NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $2,000
ID: 2615871 • Letter: N
Question
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 owners words on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of 2 50 er month for the next 5, 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: Be sure to use 1% per month.) Select- 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 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 c. The store owner is not sure of the 1296 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 calculationsExplanation / Answer
a) Old Lease Year Lease Payment per month PV @ 1% Present Value 1 -2000 0.99009901 -$1,980.20 2 -2000 0.980296049 -$1,960.59 3 -2000 0.970590148 -$1,941.18 4 -2000 0.960980344 -$1,921.96 5 -2000 0.951465688 -$1,902.93 6 -2000 0.942045235 -$1,884.09 7 -2000 0.932718055 -$1,865.44 8 -2000 0.923483222 -$1,846.97 9 -2000 0.914339824 -$1,828.68 10 -2000 0.905286955 -$1,810.57 11 -2000 0.896323718 -$1,792.65 12 -2000 0.887449225 -$1,774.90 13 -2000 0.878662599 -$1,757.33 14 -2000 0.86996297 -$1,739.93 15 -2000 0.861349475 -$1,722.70 16 -2000 0.852821262 -$1,705.64 17 -2000 0.844377487 -$1,688.75 18 -2000 0.836017314 -$1,672.03 19 -2000 0.827739915 -$1,655.48 20 -2000 0.81954447 -$1,639.09 21 -2000 0.811430169 -$1,622.86 22 -2000 0.803396207 -$1,606.79 23 -2000 0.795441789 -$1,590.88 24 -2000 0.787566127 -$1,575.13 25 -2000 0.779768443 -$1,559.54 26 -2000 0.772047963 -$1,544.10 27 -2000 0.764403924 -$1,528.81 28 -2000 0.756835568 -$1,513.67 29 -2000 0.749342147 -$1,498.68 30 -2000 0.741922918 -$1,483.85 31 -2000 0.734577146 -$1,469.15 32 -2000 0.727304105 -$1,454.61 33 -2000 0.720103075 -$1,440.21 34 -2000 0.712973341 -$1,425.95 35 -2000 0.705914199 -$1,411.83 36 -2000 0.69892495 -$1,397.85 37 -2000 0.692004901 -$1,384.01 38 -2000 0.685153367 -$1,370.31 39 -2000 0.67836967 -$1,356.74 40 -2000 0.671653139 -$1,343.31 41 -2000 0.665003108 -$1,330.01 42 -2000 0.658418919 -$1,316.84 43 -2000 0.651899919 -$1,303.80 44 -2000 0.645445465 -$1,290.89 45 -2000 0.639054916 -$1,278.11 46 -2000 0.632727639 -$1,265.46 47 -2000 0.626463009 -$1,252.93 48 -2000 0.620260405 -$1,240.52 49 -2000 0.614119213 -$1,228.24 50 -2000 0.608038825 -$1,216.08 51 -2000 0.602018638 -$1,204.04 52 -2000 0.596058058 -$1,192.12 53 -2000 0.590156493 -$1,180.31 54 -2000 0.584313359 -$1,168.63 55 -2000 0.578528078 -$1,157.06 56 -2000 0.572800078 -$1,145.60 57 -2000 0.56712879 -$1,134.26 58 -2000 0.561513653 -$1,123.03 59 -2000 0.555954112 -$1,111.91 60 -2000 0.550449616 -$1,100.90 PV cost of old lease -$89,910.08 New Lease Year Lease Payment per month PV @ 1% Present Value 1 0 0.99009901 $0.00 2 0 0.980296049 $0.00 3 0 0.970590148 $0.00 4 0 0.960980344 $0.00 5 0 0.951465688 $0.00 6 0 0.942045235 $0.00 7 0 0.932718055 $0.00 8 0 0.923483222 $0.00 9 0 0.914339824 $0.00 10 -2500 0.905286955 -$2,263.22 11 -2500 0.896323718 -$2,240.81 12 -2500 0.887449225 -$2,218.62 13 -2500 0.878662599 -$2,196.66 14 -2500 0.86996297 -$2,174.91 15 -2500 0.861349475 -$2,153.37 16 -2500 0.852821262 -$2,132.05 17 -2500 0.844377487 -$2,110.94 18 -2500 0.836017314 -$2,090.04 19 -2500 0.827739915 -$2,069.35 20 -2500 0.81954447 -$2,048.86 21 -2500 0.811430169 -$2,028.58 22 -2500 0.803396207 -$2,008.49 23 -2500 0.795441789 -$1,988.60 24 -2500 0.787566127 -$1,968.92 25 -2500 0.779768443 -$1,949.42 26 -2500 0.772047963 -$1,930.12 27 -2500 0.764403924 -$1,911.01 28 -2500 0.756835568 -$1,892.09 29 -2500 0.749342147 -$1,873.36 30 -2500 0.741922918 -$1,854.81 31 -2500 0.734577146 -$1,836.44 32 -2500 0.727304105 -$1,818.26 33 -2500 0.720103075 -$1,800.26 34 -2500 0.712973341 -$1,782.43 35 -2500 0.705914199 -$1,764.79 36 -2500 0.69892495 -$1,747.31 37 -2500 0.692004901 -$1,730.01 38 -2500 0.685153367 -$1,712.88 39 -2500 0.67836967 -$1,695.92 40 -2500 0.671653139 -$1,679.13 41 -2500 0.665003108 -$1,662.51 42 -2500 0.658418919 -$1,646.05 43 -2500 0.651899919 -$1,629.75 44 -2500 0.645445465 -$1,613.61 45 -2500 0.639054916 -$1,597.64 46 -2500 0.632727639 -$1,581.82 47 -2500 0.626463009 -$1,566.16 48 -2500 0.620260405 -$1,550.65 49 -2500 0.614119213 -$1,535.30 50 -2500 0.608038825 -$1,520.10 51 -2500 0.602018638 -$1,505.05 52 -2500 0.596058058 -$1,490.15 53 -2500 0.590156493 -$1,475.39 54 -2500 0.584313359 -$1,460.78 55 -2500 0.578528078 -$1,446.32 56 -2500 0.572800078 -$1,432.00 57 -2500 0.56712879 -$1,417.82 58 -2500 0.561513653 -$1,403.78 59 -2500 0.555954112 -$1,389.89 60 -2500 0.550449616 -$1,376.12 PV cost of new lease -$90,972.55 Sharon should not accept the new lease because the present value of its cost is $90,972.55 - $89,910.08 = $1062.47 greater than the old lease b) The FV of old lease the first 9 months’ rent is equivalent to the PV of the 51-period annuity whose payments represent the incremental rent during months 10-60 Future Value of 9 Months Old Lease Payment per month -$2,000.00 Rate 1.00% Nper 9 Months Future Value of 9 Months = FV(1%,9,-2000,0) $18,737.05 51-period annuity Present Value $18,737.05 Rate 1.00% Nper 51 Months Incremental payment = PMT(1%,51,-18737.05) $470.80 The new lease payment that will make her indifferent is $2,000 + $470.80 = $2,470.80 c) Indifferent rate of Return Year Old Lease Payment per month New Lease Payment per month Difference 1 -2000 0 -2000 2 -2000 0 -2000 3 -2000 0 -2000 4 -2000 0 -2000 5 -2000 0 -2000 6 -2000 0 -2000 7 -2000 0 -2000 8 -2000 0 -2000 9 -2000 -2500 500 10 -2000 -2500 500 11 -2000 -2500 500 12 -2000 -2500 500 13 -2000 -2500 500 14 -2000 -2500 500 15 -2000 -2500 500 16 -2000 -2500 500 17 -2000 -2500 500 18 -2000 -2500 500 19 -2000 -2500 500 20 -2000 -2500 500 21 -2000 -2500 500 22 -2000 -2500 500 23 -2000 -2500 500 24 -2000 -2500 500 25 -2000 -2500 500 26 -2000 -2500 500 27 -2000 -2500 500 28 -2000 -2500 500 29 -2000 -2500 500 30 -2000 -2500 500 31 -2000 -2500 500 32 -2000 -2500 500 33 -2000 -2500 500 34 -2000 -2500 500 35 -2000 -2500 500 36 -2000 -2500 500 37 -2000 -2500 500 38 -2000 -2500 500 39 -2000 -2500 500 40 -2000 -2500 500 41 -2000 -2500 500 42 -2000 -2500 500 43 -2000 -2500 500 44 -2000 -2500 500 45 -2000 -2500 500 46 -2000 -2500 500 47 -2000 -2500 500 48 -2000 -2500 500 49 -2000 -2500 500 50 -2000 -2500 500 51 -2000 -2500 500 52 -2000 -2500 500 53 -2000 -2500 500 54 -2000 -2500 500 55 -2000 -2500 500 56 -2000 -2500 500 57 -2000 -2500 500 58 -2000 -2500 500 59 -2000 -2500 500 60 -2000 -2500 500 Monthly IRR 1.74% Annual IRR = 12 x 1.74 20.90%
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