Question

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 $2,600 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-YesNoItem 1
2. 
   
3. 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.
   
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4. 
   
5. 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	Present Value of cash flows for old lease
	Rate	Disacount rate per month=WACC	1%
	Nper	Number of months of payment	60
	Pmt	Monthly Payment	$2,100
	PV	Present Value of cash flows for old lease	$94,405.58
	a	Present Value of cash flows for NEW lease
	Rate	Disacount rate per month=WACC	1%
	Nper	Number of months of payment	51	(60-9)
	Pmt	Monthly Payment	$2,600
	PV	Value of cash flow at end of 9th month	$103,475.15
		Present Value of Cash Flow today=103475.15/((1+0.01)^9)
		Present Value of cash flow of New Lease	$94,611.45	103475.15/(1.01^9)
		The New Lease should not be accepted
		Becasuse, Present Value of cash outflow for the new lease is higher
	c	Future Value of old Lease at end of nine months	$103,249.99	(94405.58^(1.01^9)
		To be indifferent, Present value of new lease at end of year 9 =		$103,249.99
	Rate	Disacount rate per month=WACC	1%
	Nper	Number of months of payment	51
	PV	Present Value of new lease at end of month9	$103,249.99
	PMT	Monthly payment which is indifferent	$2,594.34
	e		A	B	C=A-B
			Rent under	Rent under	Difference
		Month	New lease	Old lease	in Cash Flow
		1	$0	$2,100	($2,100)
		2	$0	$2,100	($2,100)
		3	$0	$2,100	($2,100)
		4	$0	$2,100	($2,100)
		5	$0	$2,100	($2,100)
		6	$0	$2,100	($2,100)
		7	$0	$2,100	($2,100)
		8	$0	$2,100	($2,100)
		9	$0	$2,100	($2,100)
		10	$2,600	$2,100	$500
		11	$2,600	$2,100	$500
		12	$2,600	$2,100	$500
		13	$2,600	$2,100	$500
		14	$2,600	$2,100	$500
		15	$2,600	$2,100	$500
		16	$2,600	$2,100	$500
		17	$2,600	$2,100	$500
		18	$2,600	$2,100	$500
		19	$2,600	$2,100	$500
		20	$2,600	$2,100	$500
		21	$2,600	$2,100	$500
		22	$2,600	$2,100	$500
		23	$2,600	$2,100	$500
		24	$2,600	$2,100	$500
		25	$2,600	$2,100	$500
		26	$2,600	$2,100	$500
		27	$2,600	$2,100	$500
		28	$2,600	$2,100	$500
		29	$2,600	$2,100	$500
		30	$2,600	$2,100	$500
		31	$2,600	$2,100	$500
		32	$2,600	$2,100	$500