FINES
Fines
are regular lump sum payments paid by the lessee under the lease
agreement but at a different period to that of the base rent
EXAMPLE
Under
a 10 year lease agreement, the lessee is required to pay $1000 every
3rd year over and above the base rent of $8 000 pa. What is the
annual rental equivalent using 12%pa?
The
payments fall due as follows:
LEASE
PERIOD YEARS
0========3=========6========9====>
base
rent 20 000 pa
FINES:
$1000
$1000 $1000
STEP
1
Convert
the fine to an annual rental equivalent for the fine period only.
Because the fine is paid at the end of the 3 year period, the FVPMT
factor is used instead of PVPMT which was used for premiums:
FVPMT
= (1.405 1)/(12/100) = 3.375
ARE(F)
= F/FVPMT
Where:
ARE(F)
= annual rental equivalent of the fine
F
= fine
FVPMT = future value
of 1 pa factor
ARE(F)
= 1000/3.375 = $296.3 pa
STEP
2:
ARE(F)
is added to the base rent to find the ARE of the lease:
ARE(lease)
= ARE(F) + base rent = 296.3 + 8000 = $8296.3 pa