Question

A store has 5 years remaining on its lease in a mall. Rent is $2,000 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 $2,700 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

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

   -Select- (Yes/No)

2. 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.) Do not round intermediate calculations. Round your answer to the nearest cent.

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3. 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.) Do not round intermediate calculations. Round your answer to two decimal places.

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Answer 1

	a	Present Value of 60 payments:
	Rate	Monthly Discount rate =WACC=	1%
	Nper	Number of months of payments	60
	Pmt	Monthly Payments	$2,000
	PV	Present Value of 60 payments at t=0	$89,910
		Future value of 60 payments at t=9	$98,333	(89910*(1.01^9)
		Present Value of new lease payments:
	Rate	Monthly Discount rate =WACC=	1%
	Nper	Number of months of payments	51
	Pmt	Monthly Payments	$2,700
	PV	Present Value of Payments at t=9	$107,455
		Present Value of new lease paymentsat t=0	$98,250.36	107455/(1.01^9)
		No ,it should not be accepted
		Present Value of new lease payment is higher
	b
		Future Value of Old Lease Payments at t=9	$98,333
		Present Value ofNew Lease Payments(at t=9) to make it indifferent =	$98,333
	Rate	Monthly Discount rate =WACC=	1%
	Nper	Number of months of payments	51
	Pv	Present Value of Payments at t=9	$98,333
	PMT	Monthly Payment to make it indifferent	$2,470.80
		(Using PMT function of excel)
				Cash Flow	Incremental
	c		Month	New Lease	Old Lease	Cash Flow
			0	$0	$2,000	($2,000)
			1	$0	$2,000	($2,000)
			2	$0	$2,000	($2,000)
			3	$0	$2,000	($2,000)
			4	$0	$2,000	($2,000)
			5	$0	$2,000	($2,000)
			6	$0	$2,000	($2,000)
			7	$0	$2,000	($2,000)
			8	$0	$2,000	($2,000)
			9	$0	$2,000	($2,000)
			10	$2,700	$2,000	$700
			11	$2,700	$2,000	$700
			59	$2,700	$2,000	$700
			60	$2,700	$2,000	$700
		Internal Rate of Return of Incremental Cash flow	2.06%	(Using IRR function of excel over incremental cash flow)
		Required Nominal WACC=12*2.06%=	24.72%