NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $2,000 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 $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). 11-18 a. Should the new lease be accepted? (Hint: Make sure you use 1% per month.) b. If the store owner decided to bargain with the mall's owner over the new lease pay- ment, 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.) 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.)
NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $2,000 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 $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). 11-18 a. Should the new lease be accepted? (Hint: Make sure you use 1% per month.) b. If the store owner decided to bargain with the mall's owner over the new lease pay- ment, 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.) 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Prob1
PRob2
Prob3
Prob4
11-18
NPV AND IRR Astore has 5 years remaining on its lease in a mall. Rent is $2,000 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 $2,600
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: Make sure you use 1% per month.)
b. If the store owner decided to bargain with the mall's owner over the new lease pay-
ment, 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.)
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.)
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