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

Question

2 years ago

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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 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 amiddot"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? ____
b. 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 the old leases? 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? Do not round your intermediate calculations. ____ %

Business

1 answer:

photoshop1234 [79] · Answer 1 · 2022-08-02T05:06:13+03:00

Answer:

a) No, since the present value of new lease is more than old.

b) Detailed information about the explanation is shown below

c) At 39.80% nominal WACC

Explanation:

a

PV of old and new lease terms

Old Cash Flow New Cash Flow

0 0 0 0

1-9 - 1900 1-9 0

10-60 - 1900 10-60 2700

NPER 60 NPER 60

rate 1% rate 1%

PV ($85,414.57) PV ($98,250.36)

PV ( 1%, 60, 1900) PV ( 1%,9,- PV(1%,51, 2700))

Should the new lease be accepted? <u> No, since the present value of new lease is more than old.</u>

b) 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 the old leases?

For this part pv of old lease should be equal to pv of new lease at t = 9

85414.57 × (1.01)⁹ 93416.657

Nper 51

Rate 1%

New lease amount ( $2,347.26)

PMT (1%, 51,93416.66)

c)

Period Old Lease New Lease Change in lease

0 0 0 0

1-9 -1900 0 -1900

10-60 -1900 -2700 800

-1900

800

3.317% x 12 = 39.80%

IRR(Values 1:60)

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?

At 39.80% nominal WACC