A store has 5 years remaining on its lease in a mall Rent is

A store has 5 years remaining on its lease in a mall. Rent is $2,100 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 $2,500 per month for the next 51 months. The lease cannot be broken, and the store\'s WACC is 12% (or 1% per month).

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.

Solution

A B C D E F G H 2 3 4 Months Old Lease Payments New Lease Payments Difference in Payments 5 0 0 6 1 $2,100.00 2100 7 2 $2,100.00 2100 8 3 $2,100.00 2100 9 4 $2,100.00 2100 10 5 $2,100.00 2100 11 6 $2,100.00 2100 12 7 $2,100.00 2100 13 8 $2,100.00 2100 14 9 $2,100.00 2100 15 10 $2,100.00 $2,500.00 -400 16 11 $2,100.00 $2,500.00 -400 17 12 $2,100.00 $2,500.00 -400 18 13 $2,100.00 $2,500.00 -400 19 14 $2,100.00 $2,500.00 -400 20 15 $2,100.00 $2,500.00 -400 21 16 $2,100.00 $2,500.00 -400 22 17 $2,100.00 $2,500.00 -400 23 18 $2,100.00 $2,500.00 -400 24 19 $2,100.00 $2,500.00 -400 25 20 $2,100.00 $2,500.00 -400 26 21 $2,100.00 $2,500.00 -400 27 22 $2,100.00 $2,500.00 -400 28 23 $2,100.00 $2,500.00 -400 29 24 $2,100.00 $2,500.00 -400 30 25 $2,100.00 $2,500.00 -400 31 26 $2,100.00 $2,500.00 -400 32 27 $2,100.00 $2,500.00 -400 33 28 $2,100.00 $2,500.00 -400 34 29 $2,100.00 $2,500.00 -400 35 30 $2,100.00 $2,500.00 -400 36 31 $2,100.00 $2,500.00 -400 37 32 $2,100.00 $2,500.00 -400 38 33 $2,100.00 $2,500.00 -400 39 34 $2,100.00 $2,500.00 -400 40 35 $2,100.00 $2,500.00 -400 41 36 $2,100.00 $2,500.00 -400 42 37 $2,100.00 $2,500.00 -400 43 38 $2,100.00 $2,500.00 -400 44 39 $2,100.00 $2,500.00 -400 45 40 $2,100.00 $2,500.00 -400 46 41 $2,100.00 $2,500.00 -400 47 42 $2,100.00 $2,500.00 -400 48 43 $2,100.00 $2,500.00 -400 49 44 $2,100.00 $2,500.00 -400 50 45 $2,100.00 $2,500.00 -400 51 46 $2,100.00 $2,500.00 -400 52 47 $2,100.00 $2,500.00 -400 53 48 $2,100.00 $2,500.00 -400 54 49 $2,100.00 $2,500.00 -400 55 50 $2,100.00 $2,500.00 -400 56 51 $2,100.00 $2,500.00 -400 57 52 $2,100.00 $2,500.00 -400 58 53 $2,100.00 $2,500.00 -400 59 54 $2,100.00 $2,500.00 -400 60 55 $2,100.00 $2,500.00 -400 61 56 $2,100.00 $2,500.00 -400 62 57 $2,100.00 $2,500.00 -400 63 58 $2,100.00 $2,500.00 -400 64 59 $2,100.00 $2,500.00 -400 65 60 $2,100.00 $2,500.00 -400 66 67 IRR of Difference in Payments 3.087% =12*IRR(F5:F65) 68 69 Hence Required WACC is 3.087% 70