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To open a new location, you must choose either to buy a building or to 15 Oct 2023, 23:42
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Average annual mortgage expense: $54,672 Average annual lease expense: $59,934
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Data Insights (DI) Butler 2023-24 [Question #43, Date: Oct-16-2023] [Click here for Details]

To open a new location, you must choose either to buy a building or to lease the same space. Leasing the building for three years will require a monthly payment of $4,850 plus a one-time maintenance and security fee of $5,202. If you purchase the building for $450,000 at 4% for 10 years, the monthly mortgage payment will be $4,556. Find the total annual payment on the mortgage and the average annual cost of leasing.
Average annual mortgage expense Average annual lease expense
$51,384
$54,672
$55,849
$58,200
$59,934
$60,049
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Average annual mortgage expense: $54,672 Average annual lease expense: $59,934
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Average annual mortgage expense-54,672
Average annual lease expense-59,934
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Avg annual mortage: is monthly mortage cost ($4,556) * 12 months (12 months per year) = $54,672.

Avg annual lease: one-time cost broken down to 36 months is $5,202/36=$144.5 because it’s a 36-month lease. Add avg monthly payment with 144.50 for total monthly payment and then multiply by 12 to get $59,934.

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Sajjad1994
Data Insights (DI) Butler 2023-24 [Question #43, Date: Oct-16-2023] [Click here for Details]

To open a new location, you must choose either to buy a building or to lease the same space. Leasing the building for three years will require a monthly payment of $4,850 plus a one-time maintenance and security fee of $5,202. If you purchase the building for $450,000 at 4% for 10 years, the monthly mortgage payment will be $4,556. Find the total annual payment on the mortgage and the average annual cost of leasing.
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­Hi [url=https://gmatclub.com:443/forum/memberlist.php?mode=viewprofile&un=Sajjad1994]Sajjad1994! Can u pls explain me why, in calculating the annual lease expense, we are calculating fees per month for the 1-time fee,which is $5202. This is a 1time fee right?How is it dependent on the no of years?We can just add it as it is for 3 years and 10 yaers alike.  So, the annual lease expense will be  ((4850 * 120) + 5202)/10. Whats the flaw in my answer?
 ­­
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imRaj
­The amount of 5202 is a one time maintenace and security fee for 3 years. The amount could be more if number of years were more. But that is not something we should get worried about. In that case, the property purchased would not require any investment after 10 years. The yearly would then decrease as we calculate for 20 years or 30 years.

 
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The amount for lease has to be calculated for 3 years and for purchase for 10 years.

Solution: 

Leasing the building for three years will require a monthly payment of $4,850 plus a one-time maintenance and security fee of $5,202.
the average annual cost of leasing: 
Notice we are asked for average, as in the year security fees is paid, the annual amount will be more.
Monthly payment = 4850, so annual = 4850*12
Security fee for 3 years = 5202, so annual = 5202/3 = 1734
Total = 58200 + 1734 = 59934$

If you purchase the building for $450,000 at 4% for 10 years, the monthly mortgage payment will be $4,556.
the total annual payment on the mortgage:
Here, the payment is constant = 4556*12 = 54672$­
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