Click here to read the eBook: Net Present Value (NPV) Click here to read the eBo

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Click here to read the eBook: Net Present Value (NPV) Click here to read the eBook: Internal Rate of Return (IRR) NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $1,900 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: Be sure to use 196 per month.) No 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 att- 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. $2146.20 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

Old Lease Rent = PMT per month $1,900 Payments Remaining 60 Cost of capital 12%/12 1.00% Present value of lease = PV(1%,60,-1900) $85,414.57 New Lease Rent = PMT per month $2,600 Period = no rent for 9 months = 60-9 51 Cost of capital 12%/12 1.00% Present value of lease = calculated using NPV function in excel = NPV (1%payments) $94,611.45 $9,196.88 The store owner should not accept the new lease because the present value of its cost is $94,611.36 - $85,414.57= $9,196.88 greater than the old lease NO b) FV of first 9 months’ rent under old lease: Old Lease Rent = PMT per month $1,900 Payments Remaining 9 Cost of capital 12%/12 1.00% Future value of lease = FV(1%,60,-1900) $17,800.2 The FV of the first 9 months’ rent is equivalent to the PV of the 51-period annuity whose payments represent the incremental rent during months 10-6 New leases Present Value $17,800.2 Nper 51 Rate 1.00% New leases payment = PMT(1%,51,-17,800.2) $447.26 The new lease payment that will make her indifferent is $1900 + $447.26 $2,347.26 c) IRR (calculated using IRR function in excel) Periodic IRR = 2.74% Annual IRR = 3.32% x 12 32.91% Year Old Lease payments New Lease Payments Difference 0 0 0 0 1 -1900 0 -1900 2 -1900 0 -1900 3 -1900 0 -1900 4 -1900 0 -1900 5 -1900 0 -1900 6 -1900 0 -1900 7 -1900 0 -1900 8 -1900 0 -1900 9 -1900 0 -1900 10 -1900 -2600 700 11 -1900 -2600 700 12 -1900 -2600 700 13 -1900 -2600 700 14 -1900 -2600 700 15 -1900 -2600 700 16 -1900 -2600 700 17 -1900 -2600 700 18 -1900 -2600 700 19 -1900 -2600 700 20 -1900 -2600 700 21 -1900 -2600 700 22 -1900 -2600 700 23 -1900 -2600 700 24 -1900 -2600 700 25 -1900 -2600 700 26 -1900 -2600 700 27 -1900 -2600 700 28 -1900 -2600 700 29 -1900 -2600 700 30 -1900 -2600 700 31 -1900 -2600 700 32 -1900 -2600 700 33 -1900 -2600 700 34 -1900 -2600 700 35 -1900 -2600 700 36 -1900 -2600 700 37 -1900 -2600 700 38 -1900 -2600 700 39 -1900 -2600 700 40 -1900 -2600 700 41 -1900 -2600 700 42 -1900 -2600 700 43 -1900 -2600 700 44 -1900 -2600 700 45 -1900 -2600 700 46 -1900 -2600 700 47 -1900 -2600 700 48 -1900 -2600 700 49 -1900 -2600 700 50 -1900 -2600 700 51 -1900 -2600 700 52 -1900 -2600 700 53 -1900 -2600 700 54 -1900 -2600 700 55 -1900 -2600 700 56 -1900 -2600 700 57 -1900 -2600 700 58 -1900 -2600 700 59 -1900 -2600 700 60 -1900 -2600 700 IRR 2.74%

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