NPV AND TRK A store has 5 years remaining on its lease in a mall. Rent is $2,000
ID: 2791749 • Letter: N
Question
NPV AND TRK 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 $2,750 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: Be sure to use 1% per month.) -Select-1 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 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.) Round your answer to two decimal places. Do not round your intermediate calculations.Explanation / Answer
a. The Present value of the old lease = PV(1%,60,2000) = $89,910.08
The present value of the new lease will be computed as follows
FV of new lease at time 9 = PV(1%, 51, 2750) = $109,444.87
This will be discounted at 1% to find the present value now = PV(1%,9,,109444.87)
= $100,069.81
Since the PV of the new lease cost is higher than the PV of the old lease, it should not be accepted.
b. The FV of the first 9 months of old lease = $18,737.05
This is equal to the PV of lease at end of month 9.
The FV of the first 9 months’ rent = PV of the 51-period annuity whose payments represent the incremental rent during months 10-60. To find this value we use the PMT function as= PMT(1%, 51, 18737.05)
= $470.80
Hence the new lease payment should be equal to 2000+470.80 = $2470.80
c. To find the WACC at which he will be indifferent, we should equate the cash flows of the 2 streams and find the IRR using IRR function in excel. This amounts to 2.8172% pm = 33.81% p.a
Period
CF-Old
CF-New
Incremental cash flow
0
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
0
2000
10
2000
2750
-750
11
2000
2750
-750
12
2000
2750
-750
13
2000
2750
-750
14
2000
2750
-750
15
2000
2750
-750
16
2000
2750
-750
17
2000
2750
-750
18
2000
2750
-750
19
2000
2750
-750
20
2000
2750
-750
21
2000
2750
-750
22
2000
2750
-750
23
2000
2750
-750
24
2000
2750
-750
25
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-750
26
2000
2750
-750
27
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2750
-750
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2750
-750
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2750
-750
30
2000
2750
-750
31
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2750
-750
32
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2750
-750
33
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2750
-750
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2750
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38
2000
2750
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2000
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-750
40
2000
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-750
41
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2750
-750
42
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-750
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-750
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-750
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2750
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51
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-750
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-750
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-750
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57
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-750
58
2000
2750
-750
59
2000
2750
-750
60
2000
2750
-750
2.8172%
Period
CF-Old
CF-New
Incremental cash flow
0
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
0
2000
10
2000
2750
-750
11
2000
2750
-750
12
2000
2750
-750
13
2000
2750
-750
14
2000
2750
-750
15
2000
2750
-750
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2000
2750
-750
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2000
2750
-750
18
2000
2750
-750
19
2000
2750
-750
20
2000
2750
-750
21
2000
2750
-750
22
2000
2750
-750
23
2000
2750
-750
24
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2750
-750
25
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2750
-750
26
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2750
-750
27
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2750
-750
28
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2750
-750
29
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2750
-750
30
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2750
-750
31
2000
2750
-750
32
2000
2750
-750
33
2000
2750
-750
34
2000
2750
-750
35
2000
2750
-750
36
2000
2750
-750
37
2000
2750
-750
38
2000
2750
-750
39
2000
2750
-750
40
2000
2750
-750
41
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2750
-750
42
2000
2750
-750
43
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2750
-750
44
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2750
-750
45
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2750
-750
46
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2750
-750
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2750
-750
48
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2750
-750
49
2000
2750
-750
50
2000
2750
-750
51
2000
2750
-750
52
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2750
-750
53
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2750
-750
54
2000
2750
-750
55
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2750
-750
56
2000
2750
-750
57
2000
2750
-750
58
2000
2750
-750
59
2000
2750
-750
60
2000
2750
-750
IRR2.8172%
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