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 the time to be high so 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 percent (or 1 percent per month). Should the new lease be accepted? (Hint: Be sure to use 1 percent per month).

Question

Business

Bianca Pittman

22 June, 10:09

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 the time to be high so 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 percent (or 1 percent per month). Should the new lease be accepted? (Hint: Be sure to use 1 percent per month).

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Answers (1)

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Carter Ray · Answer 1

Solution:

Sum Present value of 60 payments

Rent 2000

Periods 60

Rate 12%

Present value of 60 payments $94,405 (Excel = PV (1%, 60, 2000))

Future value of these payments at t=9

Future value $1,03,249.99 (Excel=FV (1%,9,94,405)

Periods 51

Rate 12%