You are working as a financial analyst for Sakwera Company. The company is considering leasing a new office building. The lease agreement has the following terms:
▪ Lease term: 10 years
▪ Annual rent: TZS500,000
▪ Escalation clause: Rent increases by 3% annually
▪ Purchase option: The company has the option to purchase the building at the end of the lease term for TZS1 million.
From the given data above, create a schedule showing the annual rent payments for the entire lease term, considering the escalation clause
To create a schedule showing the annual rent payments for the entire lease term, considering the escalation clause, we can follow these steps:
1. Calculate the annual rent payments for the first year: TZS500,000.
2. For each subsequent year, calculate the rent increase by multiplying the previous year's rent by 3% (0.03). Add the rent increase to the previous year's rent payment to get the new annual rent payment.
3. Repeat step 2 for the remaining lease term, which is 10 years.
Here is the schedule showing the annual rent payments for the entire lease term:
Year 1: TZS500,000
Year 2: TZS515,000 (TZS500,000 + TZS500,000 * 0.03)
Year 3: TZS530,450 (TZS515,000 + TZS515,000 * 0.03)
Year 4: TZS546,335.5 (TZS530,450 + TZS530,450 * 0.03)
Year 5: TZS562,670.67 (TZS546,335.5 + TZS546,335.5 * 0.03)
Year 6: TZS579,470.10 (TZS562,670.67 + TZS562,670.67 * 0.03)
Year 7: TZS596,748.32 (TZS579,470.10 + TZS579,470.10 * 0.03)
Year 8: TZS614,520.29 (TZS596,748.32 + TZS596,748.32 * 0.03)
Year 9: TZS632,801.56 (TZS614,520.29 + TZS614,520.29 * 0.03)
Year 10: TZS651,608.45 (TZS632,801.56 + TZS632,801.56 * 0.03)
Please note that these calculations assume that the rent increase is applied at the beginning of each year.