Question

11-

NPV AND IRR

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 $2,700 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-YesNoItem 1
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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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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.
   
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Answer 1

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W i v D a 1x 3 ENG 08:13 16-03-2020 ... o X : x fix Formula Bar CV CW _ cx Formula CY CZ - 2100 present value of 60 payments rent periods rate present value of 60 payments 60 12% $ 94,405.58 excel =PV(1%,60,-2100) CX127 CU 106 107 SUM 108 109 110 111 112 113 114 115 116 117 b 118 a 119 120 c 121 future value of these payments at t =9 future value $ 1,03,249.99 excel =FV(1%,9,,-94405.58) periods 51 rate 12% rent per month $ 2,594.34 excel =PMT(1%,51,-103249.99) NO, IT SHOULD NOT BE ACCEPTED AS RENT SHOULD BE 2594.34 NEW LEASE FIRST 9 MONTHS NEXT 51 MONTHS OLD LEASE 2100 2100 DIFFERENCE (NEW -OLD) -2100 600 122 2700 123 124 IRR = NOMINAL WACC 1.7222% 20.67% [1.7222% X 12] 125 126 127 128 129 ܠܩܟܘ ... LOAN OPTIONS pv, fv, annuity CAP STRU VALUE PM, PMT | loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPO | NPER APR CPI ear ... + :

W i v D a 1x 3 ENG 08:13 16-03-2020 ... o X : x fix Formula Bar CV CW _ cx Formula CY CZ - 2100 present value of 60 payments rent periods rate present value of 60 payments 60 12% $ 94,405.58 excel =PV(1%,60,-2100) CX127 CU 106 107 SUM 108 109 110 111 112 113 114 115 116 117 b 118 a 119 120 c 121 future value of these payments at t =9 future value $ 1,03,249.99 excel =FV(1%,9,,-94405.58) periods 51 rate 12% rent per month $ 2,594.34 excel =PMT(1%,51,-103249.99) NO, IT SHOULD NOT BE ACCEPTED AS RENT SHOULD BE 2594.34 NEW LEASE FIRST 9 MONTHS NEXT 51 MONTHS OLD LEASE 2100 2100 DIFFERENCE (NEW -OLD) -2100 600 122 2700 123 124 IRR = NOMINAL WACC 1.7222% 20.67% [1.7222% X 12] 125 126 127 128 129 ܠܩܟܘ ... LOAN OPTIONS pv, fv, annuity CAP STRU VALUE PM, PMT | loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPO | NPER APR CPI ear ... + :