Question

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 $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

Required:
a. 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 the old leases?

Answer 1

$2,594.34

Step-by-step explanation:

To determine which lease value would make the store owner indifferent between the two options, we have to determine the future value of the first 9 payments that are not paid. Then that value should be equal to the present value of the increase in rent for the next 51 months:

step 1, calculate future value of 9 payments:

F V = payment x [(1 + r)ⁿ - 1] / r

• payment = $2,100
• r = 1%
• n = 9

F V = $2,100 x [(1 + 0.01)⁹ - 1] / 0.01 = $19,674

step 2, calculate the present value of the increase in rent:

PV = payment / {1 - [1 / (1 + r)ⁿ] / r}

• payment = $19,674
• r = 1%
• n = 51

PV = $19,674 / ({1 - [1 / (1 + 0.01)⁵¹]} / 0.01) = $19,674 / 39.8 = $494.34

the new lease payment for which the store owner would be indifferent = $2,100 + $494.34 = $2,594.34