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Thread: Please help...

  1. #1
    Junior Member
    Oct 2006

    Please help...

    Could you please help me with this problem?

    7 A store has 5 years remaining on its lease in a mall. Rent is $2000 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 $2,600 per month for the next 51 months. The lease cannot be broken, and the store’s weighted average cost of capital is 12%
    a- should the new lease be accepted?
    b- If the store owner decided to bargain with the mall’s owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (hint, find FV aof the old lease’s original cost at t =9, then treat this as the PV of a 51 period annyity whose payments represent the rent during months 10 to 60)
    c- the store owner is not sure of the 12$ weighed average cost of capital- it could be higher or lower, at what nominal weighed average cost of capital would the store owner be indifferent between the two leases? (hint: calculate the differences between the two payment streams; the find internal rate of return)

    my answers are:
    a- No; Pvold = -$89,910.08 PVnew = -$94,611.45
    b $2,470.80
    c 22.94%

    are those answers correct? could you please tell me how would u solve those problems... please?

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  2. #2
    Dec 2007
    Ottawa, Canada
    All your answers are correct; good work!

    HOW did you calculate your answer for part c ?
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