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NPV AND IRR 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 malls 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 (owners 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 stores WACC is 12% (or 1% per month).

a. Should the new lease be accepted? (Hint: Make sure you use 1% per month.)

b. If the store owner decided to bargain with the malls 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 leases 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.)

c. The store owner is not sure of the 12% WACCit 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.)

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