Question

A store has 5 years remaining on its lease in a mall. Rent is $2,100 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

A	B	C	D	E	F	G	H
2
3
4		Months	Old Lease Payments	New Lease Payments	Difference in Payments
5		0			0
6		1	$2,100.00		2100
7		2	$2,100.00		2100
8		3	$2,100.00		2100
9		4	$2,100.00		2100
10		5	$2,100.00		2100
11		6	$2,100.00		2100
12		7	$2,100.00		2100
13		8	$2,100.00		2100
14		9	$2,100.00		2100
15		10	$2,100.00	$2,500.00	-400
16		11	$2,100.00	$2,500.00	-400
17		12	$2,100.00	$2,500.00	-400
18		13	$2,100.00	$2,500.00	-400
19		14	$2,100.00	$2,500.00	-400
20		15	$2,100.00	$2,500.00	-400
21		16	$2,100.00	$2,500.00	-400
22		17	$2,100.00	$2,500.00	-400
23		18	$2,100.00	$2,500.00	-400
24		19	$2,100.00	$2,500.00	-400
25		20	$2,100.00	$2,500.00	-400
26		21	$2,100.00	$2,500.00	-400
27		22	$2,100.00	$2,500.00	-400
28		23	$2,100.00	$2,500.00	-400
29		24	$2,100.00	$2,500.00	-400
30		25	$2,100.00	$2,500.00	-400
31		26	$2,100.00	$2,500.00	-400
32		27	$2,100.00	$2,500.00	-400
33		28	$2,100.00	$2,500.00	-400
34		29	$2,100.00	$2,500.00	-400
35		30	$2,100.00	$2,500.00	-400
36		31	$2,100.00	$2,500.00	-400
37		32	$2,100.00	$2,500.00	-400
38		33	$2,100.00	$2,500.00	-400
39		34	$2,100.00	$2,500.00	-400
40		35	$2,100.00	$2,500.00	-400
41		36	$2,100.00	$2,500.00	-400
42		37	$2,100.00	$2,500.00	-400
43		38	$2,100.00	$2,500.00	-400
44		39	$2,100.00	$2,500.00	-400
45		40	$2,100.00	$2,500.00	-400
46		41	$2,100.00	$2,500.00	-400
47		42	$2,100.00	$2,500.00	-400
48		43	$2,100.00	$2,500.00	-400
49		44	$2,100.00	$2,500.00	-400
50		45	$2,100.00	$2,500.00	-400
51		46	$2,100.00	$2,500.00	-400
52		47	$2,100.00	$2,500.00	-400
53		48	$2,100.00	$2,500.00	-400
54		49	$2,100.00	$2,500.00	-400
55		50	$2,100.00	$2,500.00	-400
56		51	$2,100.00	$2,500.00	-400
57		52	$2,100.00	$2,500.00	-400
58		53	$2,100.00	$2,500.00	-400
59		54	$2,100.00	$2,500.00	-400
60		55	$2,100.00	$2,500.00	-400
61		56	$2,100.00	$2,500.00	-400
62		57	$2,100.00	$2,500.00	-400
63		58	$2,100.00	$2,500.00	-400
64		59	$2,100.00	$2,500.00	-400
65		60	$2,100.00	$2,500.00	-400
66
67			IRR of Difference in Payments		3.087%	=12*IRR(F5:F65)
68
69		Hence Required WACC is	3.087%
70