Schweser Practice problem only, currently, beginning, practice

troymo

I’m currently working on practice problems and i came across this question.
Williams Warehousing currently has a warehouse lease that calls for five annual payments of $120,000. The warehouse owner, who needs cash, is offering Williams a deal wherein Williams will pay $200,000 this year and then pay only $80,000 each of the remaining four years. (Assume that all lease payments are made at the beginning of the year.) Should Williams Warehousing accept the offer if its required rate of return is 9%, and why?
Answer Choices.
A. Yes, there is a savings of $45,494 in present value terms.
B. No, there is an additional $80,000 payment in this year.
C. Yes, there is a savings of $49,589 in present value terms.
Schweser’s correct answer choice is C. The current terms for $120,000 for 5 years is discounted as annuity due, but the new proposed offer for $200,000 this year and $80,000 for the next 4 years is discounted as an ordinary annuity.
Am I missing something because the question states assume all payments is made at the beginning of the year, then why is the new proposed offer assumes the payments are made at the end of the year?

whew1110

well..the way I calculated it is
step1
PV lease obligations is $508766
step2
Under the offer you get: 200000 this year. and then for 4 years 80000 each.
Find the PV of annuity due of 80000 for 4 years and discount it back by 9% to bring it back to the present year. (which is the same as ordinary annuity of 80000 for 4 years)
Subtract 2 from 1 and you get savings of $49589. hope that helps

Fdez

END Payments:
PV of Lease Payments = $466,758.15
PV of Proposed Lease Payments = $421,263.84
Savings = $45,494 –option A
BGN Payments:
PV of Lease Payments = $508,766
PV of Proposed Lease Payments = $459,177.59
Savings = $49,589–option C
Since question is taking about BGN payments, option C is answer.