Time value of money: rent contracts problem

Assume there are two possible rent contracts:

Contract 1: Deposit US$150,000. No rent and get back US$150,000 after two years.

Contract 2: Deposit US$10,000. Rent of US$12,000 per year. Get back US$10,000 after two years.

If my discount factor is 1% then contact 1’s NPV > contract 2’s NPV. If my discount factor is 10% then the inverse would be true.

The solutions says that c.8.2% is the breakeven point where both contracts would be equal.

However, assume my discount factor was say 4%. Under the standard calculation, contract 1 would have the following cash flows:

T0: (150,000) T1: 0 T2: (150,000)/((1.04)^2)

This would give an NPV of (11,317).

Contract 2 would have the following cash flows:

T0: (10,000) T1: (12,000)/((1.04)^1) T2: (2000)/(1.04)^2

This gives an NPV of (23,387.57)

BUT

Contract 2 has the added advantage of me having to spend US$140,000 less at the outset. That US$140,000 has the advantage of giving me cash flows of US$5,600 (US$140,000(0.04))(1.04) in the first year (the first year figure would also earn that 4%) and US$5,600 (The amount earned in the second year).

Shouldn’t these cash flows also be added to contract 2 above thus making the solution (breakeven point of 8.2%) wrong?

1 Comments
 

Non libero facilis ab et tempora totam. Rem autem ad qui rerum quos dignissimos aut. Hic soluta quia inventore optio omnis corporis. Iure qui sint itaque sapiente eligendi. Expedita sint enim nesciunt et quia occaecati.

Est eum rem ullam adipisci unde sed ut tempora. Maiores minus omnis sed et dolore cum quo doloribus. Eius aut sapiente ut vel voluptate amet.

Inventore sint recusandae non qui. Voluptatem ab vitae iure beatae excepturi. Quia dicta necessitatibus neque suscipit sit hic.

Et quia non voluptatem laborum consequatur eum. Eum recusandae qui sequi vitae commodi id. Consectetur ipsa et id id vitae nesciunt et.

Career Advancement Opportunities

July 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.9%
  • JPMorgan 01 98.3%
  • Guggenheim Partners 01 97.8%
  • Morgan Stanley 07 97.2%

Overall Employee Satisfaction

July 2026 Investment Banking

  • Moelis & Company No 99.4%
  • Evercore No 98.9%
  • Morgan Stanley 01 98.3%
  • Banco Santander 02 97.7%
  • BMO Capital Markets 12 97.2%

Professional Growth Opportunities

July 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.9%
  • Morgan Stanley 06 98.3%
  • Goldman Sachs 01 97.8%
  • JPMorgan 01 97.2%

Total Avg Compensation

July 2026 Investment Banking

  • Vice President (16) $429
  • Associates (46) $258
  • 3rd+ Year Analyst (8) $210
  • 2nd Year Analyst (22) $179
  • Intern/Summer Associate (14) $159
  • 1st Year Analyst (80) $150
  • Intern/Summer Analyst (73) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
kanon's picture
kanon
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
CompBanker's picture
CompBanker
98.9
8
Betsy Massar's picture
Betsy Massar
98.9
9
DrApeman's picture
DrApeman
98.9
10
Linda Abraham's picture
Linda Abraham
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”