1. Suppose you sign a one-year lease to rent an apartment. In order to move into the apartment, you have to pay a $500 security deposit. The deposit will be fully refunded to you in one year's time if there is no damage to the apartment. Suppose that if you were to invest the $500, the best return you could get over 12 months is 10%. For all parts of question 1, there is no need to convert amounts to present value. We will only consider values at the end of 12 months.
a. What is the total accounting cost of the security deposit over a 12 month time horizon?
b. What is the total economic cost of the security deposit over a 12 month time horizon?
c. Once you have signed the lease, what part of the economic cost of the security deposit is an avoidable cost?
d. Once you have signed the lease, what part of the economic cost of the security deposit is sunk?