A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month,

Question

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". on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2600 per month for the next 51 months. The least cannot be broken, and the stores WACC is 12%.

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 old leases?

c. The store owner is not sure of the 12% WACC. At what nominal WACC would the store owner be indifferent between the two leases?

Could you please provide work for these solutions

Explanation / Answer

a. 5 years remaining on lease; rent = $2,000/month; 60 payments left, payment at end of month.

New lease terms: $0/month for 9 months; $2,600/month for 51 months.

Cost of capital = 12% annual (1% per month).
Old Lease New Lease
Year Cash Flow PV at 1% PV of cash flow Cash Flow PV at 1% PV of cash flow
1 $2,000.00 0.990 $1,980.20 $0.00 0.990 $0.00
2 $2,000.00 0.980 $1,960.59 $0.00 0.980 $0.00
3 $2,000.00 0.971 $1,941.18 $0.00 0.971 $0.00
4 $2,000.00 0.961 $1,921.96 $0.00 0.961 $0.00
5 $2,000.00 0.951 $1,902.93 $0.00 0.951 $0.00
6 $2,000.00 0.942 $1,884.09 $0.00 0.942 $0.00
7 $2,000.00 0.933 $1,865.44 $0.00 0.933 $0.00
8 $2,000.00 0.923 $1,846.97 $0.00 0.923 $0.00
9 $2,000.00 0.914 $1,828.68 $0.00 0.914 $0.00
10 $2,000.00 0.905 $1,810.57 $2,600.00 0.905 $2,353.75
11 $2,000.00 0.896 $1,792.65 $2,600.00 0.896 $2,330.44
12 $2,000.00 0.887 $1,774.90 $2,600.00 0.887 $2,307.37
13 $2,000.00 0.879 $1,757.33 $2,600.00 0.879 $2,284.52
14 $2,000.00 0.870 $1,739.93 $2,600.00 0.870 $2,261.90
15 $2,000.00 0.861 $1,722.70 $2,600.00 0.861 $2,239.51
16 $2,000.00 0.853 $1,705.64 $2,600.00 0.853 $2,217.34
17 $2,000.00 0.844 $1,688.75 $2,600.00 0.844 $2,195.38
18 $2,000.00 0.836 $1,672.03 $2,600.00 0.836 $2,173.65
19 $2,000.00 0.828 $1,655.48 $2,600.00 0.828 $2,152.12
20 $2,000.00 0.820 $1,639.09 $2,600.00 0.820 $2,130.82
21 $2,000.00 0.811 $1,622.86 $2,600.00 0.811 $2,109.72
22 $2,000.00 0.803 $1,606.79 $2,600.00 0.803 $2,088.83
23 $2,000.00 0.795 $1,590.88 $2,600.00 0.795 $2,068.15
24 $2,000.00 0.788 $1,575.13 $2,600.00 0.788 $2,047.67
25 $2,000.00 0.780 $1,559.54 $2,600.00 0.780 $2,027.40
26 $2,000.00 0.772 $1,544.10 $2,600.00 0.772 $2,007.32
27 $2,000.00 0.764 $1,528.81 $2,600.00 0.764 $1,987.45
28 $2,000.00 0.757 $1,513.67 $2,600.00 0.757 $1,967.77
29 $2,000.00 0.749 $1,498.68 $2,600.00 0.749 $1,948.29
30 $2,000.00 0.742 $1,483.85 $2,600.00 0.742 $1,929.00
31 $2,000.00 0.735 $1,469.15 $2,600.00 0.735 $1,909.90
32 $2,000.00 0.727 $1,454.61 $2,600.00 0.727 $1,890.99
33 $2,000.00 0.720 $1,440.21 $2,600.00 0.720 $1,872.27
34 $2,000.00 0.713 $1,425.95 $2,600.00 0.713 $1,853.73
35 $2,000.00 0.706 $1,411.83 $2,600.00 0.706 $1,835.38
36 $2,000.00 0.699 $1,397.85 $2,600.00 0.699 $1,817.20
37 $2,000.00 0.692 $1,384.01 $2,600.00 0.692 $1,799.21
38 $2,000.00 0.685 $1,370.31 $2,600.00 0.685 $1,781.40
39 $2,000.00 0.678 $1,356.74 $2,600.00 0.678 $1,763.76
40 $2,000.00 0.672 $1,343.31 $2,600.00 0.672 $1,746.30
41 $2,000.00 0.665 $1,330.01 $2,600.00 0.665 $1,729.01
42 $2,000.00 0.658 $1,316.84 $2,600.00 0.658 $1,711.89
43 $2,000.00 0.652 $1,303.80 $2,600.00 0.652 $1,694.94
44 $2,000.00 0.645 $1,290.89 $2,600.00 0.645 $1,678.16
45 $2,000.00 0.639 $1,278.11 $2,600.00 0.639 $1,661.54
46 $2,000.00 0.633 $1,265.46 $2,600.00 0.633 $1,645.09
47 $2,000.00 0.626 $1,252.93 $2,600.00 0.626 $1,628.80
48 $2,000.00 0.620 $1,240.52 $2,600.00 0.620 $1,612.68
49 $2,000.00 0.614 $1,228.24 $2,600.00 0.614 $1,596.71
50 $2,000.00 0.608 $1,216.08 $2,600.00 0.608 $1,580.90
51 $2,000.00 0.602 $1,204.04 $2,600.00 0.602 $1,565.25
52 $2,000.00 0.596 $1,192.12 $2,600.00 0.596 $1,549.75
53 $2,000.00 0.590 $1,180.31 $2,600.00 0.590 $1,534.41
54 $2,000.00 0.584 $1,168.63 $2,600.00 0.584 $1,519.21
55 $2,000.00 0.579 $1,157.06 $2,600.00 0.579 $1,504.17
56 $2,000.00 0.573 $1,145.60 $2,600.00 0.573 $1,489.28
57 $2,000.00 0.567 $1,134.26 $2,600.00 0.567 $1,474.53
58 $2,000.00 0.562 $1,123.03 $2,600.00 0.562 $1,459.94
59 $2,000.00 0.556 $1,111.91 $2,600.00 0.556 $1,445.48
60 $2,000.00 0.550 $1,100.90 $2,600.00 0.550 $1,431.17
$89,910.08

$94,611.45



PV of old lease = $89,910.08 ; Pv of new lease = $94,611.45

Sharon should not accept the new lease because the present value of its cost is $94,611.45 - $89,910.08 = $4,701.37 greater than the old lease.

b. FV of first 9 months

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