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
-1900
-1900
-1900
-1900
-1900
-1900
-1900
-1900
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
800
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
