Problem: Olga Counterman's motel and restaurant rents its facilities from Z-B corporation.
Olga has been paying 10% of the motel and restaurant's total sales to Z-B.
This past year the sales breakdown was as follows:
| Rooms |
$4,500,000 |
| Food |
800000 |
| Telephone |
50000 |
| Miscellaneous |
50000 |
| Total |
$5,400,000 |
Z-B Corporation has made two proposals to Olga regarding a new 5-year lease contract:
-Proposal A: Fixed rent of $60000 per month, due at the beginning of each month.
-Proposal B: Variable rent-due at the end of each year-as follows: 12% of room sales:3% of food sales: 2% of other sales
Olga expects total sales to increase by 20% each year over the next 5 years, and the sales mix is expected to remain constant.
Her firm's discount rate is 12%.
Question.
Identify which proposal Olga should choose and explain why.