Question

complete this right please

11. Problem 11.18 Click here to read the eBook: Net Present Value (NPV) Click here to read the eBook: Internal Rate of Return (IRR) A-2 NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $1,900 per month, 60 payments remain, and the next payment is due in 1 month. The mail'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). a. Should the new lease be accepted? (Hint: Be sure to use 19% per month.) -Select- b. If the store owner decided to bargain with the mal'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 c. 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. Secured Loan MR. BANK Grade It New Save& Centinue Continue without saving 2 MacBook Pro

Answer 1

a) Lets calculate the present value of both options using PV function on a calculator

N = 60, PMT = 1900, I/Y = 1%, FV = 0 => Compute PV = $85,414.57 for current lease.

N = 51, PMT = 2700, I/Y = 1%, FV = 0 => Compute PV = $107,454.97 for new lease 9 months from now.

Its PV today = 107,454.97 / (1 + 1%)^9 = $98,250.36 > PV of old lease

Hence, new lease should not be accepted.

b) FV of old lease, 9 month from now. FV = PV x (1 + r)^n = 85,414.57 x (1 + 1%)^9 = $93,416.66

Indifference lease can be calculated using PMT function

N = 51, PV = -93,416.66, FV = 0, I/Y = 1% => Compute PMT = $2,347.26 is the indifference lease.

c) When interest rate = 39.80%, both leases have the same PV.