172 Section 12: Real Estate and Lending
File name: HP 12c Pt Converted_user's guide_English_HDP0F123E02_080207 Page: 170 of 281
Printed Date: { 2007/8/2Dimension: 14.8 cm x 21 cm
Leases often call for periodic contractual adjustments of rental payments. For
example, a 2-year lease calls for monthly payments (at the beginning of the month)
of $500 per month for the first 6 months, $600 per month for the next 12 months,
and $750 per month for the last 6 months. This situation illustrates what is called a
“step-up” lease. A “step-down” lease is similar, except that rental payments are
decreased periodically according to the lease contract. Lease payments are made
at the beginning of the period.
In the example cited, the rental payment stream for months 7 through 24 are
“deferred annuities,” as they start at some time in the future. The cash flow
diagram from the investor’s viewpoint looks like this:
To find today’s present value of the cash flows assuming a desired yield, the NPV
technique may be used. (Refer to pages 73 through 77.)
Example 2:
A 2-year lease calls for monthly payments (at the beginning of the
month) of $500 per month for the first 6 months, $600 per month for the next 12
months, and $750 per month for the last 6 months. If you wish to earn 13.5%
annually on these cash flows, how much should you invest (what is the present
value of the lease)
?
Keystrokes
(RPN mode)
Keystrokes
(ALG mode)
Display
f]
f[
f
CLEAR
H
f
CLEAR
H
0.00
Initialize.
500
gJ
500
gJ
500.00
First cash flow.
gK
5
ga
gK
5
ga
500.00
5.00
Second through sixth cash
flows.
600
gK
12
ga
600
gK
12
ga
600.00
12.00
Next twelve cash flows.
750
gK
6
ga
750
gK
6
ga
750.00
6.00
Last six cash flows.
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