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).

Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

Yes or No

If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Round your answer to the nearest cent. Do not round your intermediate calculations.

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

i) NO ( New lease should not be accepted). We have calculated the present value under both the leases and it is found that PV of new lease is higher than PV of old lease. It means that under new lease, store owners had to pay more. New lease is good for mall owner , but bad for store owner.

For quick calculation, used PV function with interest rate = 1 %, PMT = annunity payment, NPER = time frame of payment:

Comparision:

Old Lease		New Lease
Tenure (Months)	60	Tenure (Months)	60
No EMI for Months	0	No EMI for Months	9
EMI for number of Months	60	EMI for number of Months	51
Payment Per Month for each 60 Months	$   2,100.00	Payment Per Month for each 51 Months	$       2,500.00
Effective Interest / Month	1%	Effective Interest / Month	1%
PV at t=0	$ 94,405.58	PV at t=9	$ 1,12,387.60
		PV at t=0	102760.45

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Lets assume the payment will be X per Month for last 51 months which should give same PV of old lease.

Equition: 94408.58 = [X ( 1 - 1.01^-51)/.01] x 1.01^-9

Solving X , we get X= 2296.74

(Note : easiest way to find the answer with data -> goal seek funcktion to set the PV value of new lease with 94408.58, by changing the cell of rent / month (currently 2500 for last 51 months), we get quick answar.

New Lease = Old Lease
Tenure (Months)	60
No EMI for Months	9
EMI for number of Months	51
Payment Per Month for each 51 Months	$       2,296.74
Effective Interest / Month	1%
PV at t=9	$ 1,03,249.99
PV at t=0	94405.58

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Now, we need to stock to rent of 2500 for last 51 months and zero rent for first 9 months, but we need to findout the i/ month to get same PV ( to become indifferent)

Equation : 94408.58 = [2500 ( 1 - 1(+i)^-51)/.01] x (1+i)^-9

By using gola seek fiunctioon, we found i / Month is = 1.237%

Hence, Nominal Rate = 1.237% x 12 = 14.842 %

New Lease
Tenure (Months)	60
No EMI for Months	9
EMI for number of Months	51
Payment Per Month for each 51 Months	$       2,500.00
Effective Interest / Month	1.237%
PV at t=9	$ 1,05,453.10
PV at t=0	94408.58
Nomnal Rate	14.842%