Genesco is considering two alternative 5-year leases. The first lease is for $2.

Question

Genesco is considering two alternative 5-year leases. The first lease is for $2.220 per month for 60 months. The second lease has no rent for the first 9 months, and then even monthly payments for the remaining 51 months. The company uses a WACC of 12% (monthly discounting of 1% per month) to evaluate these types of situations. At what lease payment amount on the second lease would the company be indifferent between these two options? Your answer should be between 2000.00 and 3000.00, rounded to 2 decimal places, with no special characters.

Explanation / Answer

Calculation of Break even Lease rent for second Lease:

Present value of lease rent in option of PVF @1% for 60 period

                                                                = 2220*44.96

                                                                = 99811

Suppose lease rent in second option is = X

At indifference point, present value of lease rent in both option would be equal,

So PV of lease rent in first option = PV of lease rent in Second option

99811= X* sum of PVF @ 1% for 10 to 60 periods

99811= X*36.389

X=99811/36.389

Lease rent in second option is $ 2742.89

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