A store has 5 years remaining on its lease in a mall. Rent is $2,100 per...

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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 duein 1 month. The mall's owner plans to sell the property in a yearand wants rent at that time to be high so that the property willappear more valuable. Therefore, the store has been offered a"great deal" (owner's words) on a new 5-year lease. The new leasecalls for no rent for 9 months, then payments of $2,500 per monthfor the next 51 months. The lease cannot be broken, and the store'sWACC is 12% (or 1% per month).
a) Should the new lease be accepted? (Hint: Be sure touse 1% per month.)
YES or NO
b) If the store owner decided to bargain with the mall's ownerover the new lease payment, what new lease payment would make thestore 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 paymentsrepresent the rent during months 10 to 60.) Round your answer tothe nearest cent. Do not round your intermediatecalculations.

$ __________?
C. The store owner is not sure of the 12% WACC—it could behigher or lower. At what nominal WACC would the store owner beindifferent between the two leases? (Hint: Calculate thedifferences between the two payment streams; then find its IRR.)Round your answer to two decimal places. Do not round yourintermediate calculations.
% ??

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4.1 Ratings (480 Votes)

Present value of both the payments need to be determined to compare the payments using the formula PV of an annuity P 11rnr P is the amount due after one time period r is rate of discounting and n is total time period ie For original lease P 2100 r 1 n 60 PV Original Lease at time 0 2100 111601 2100 4495504 PV Original Lease at time 0 9440558 For new lease P 2500 r 1 n 51 PV for new See Answer

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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 duein 1 month. The mall's owner plans to sell the property in a yearand wants rent at that time to be high so that the property willappear more valuable. Therefore, the store has been offered a"great deal" (owner's words) on a new 5-year lease. The new leasecalls for no rent for 9 months, then payments of $2,500 per monthfor the next 51 months. The lease cannot be broken, and the store'sWACC is 12% (or 1% per month).a) Should the new lease be accepted? (Hint: Be sure touse 1% per month.)YES or NOb) If the store owner decided to bargain with the mall's ownerover the new lease payment, what new lease payment would make thestore owner indifferent between the new and old leases?(Hint: Find FV of the old lease's original cost at t = 9;then treat this as the PV of a 51-period annuity whose paymentsrepresent the rent during months 10 to 60.) Round your answer tothe nearest cent. Do not round your intermediatecalculations.$ ____________________?C. The store owner is not sure of the 12% WACC—it could behigher or lower. At what nominal WACC would the store owner beindifferent between the two leases? (Hint: Calculate thedifferences between the two payment streams; then find its IRR.)Round your answer to two decimal places. Do not round yourintermediate calculations.__________ % ??