Question 1:

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 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 $2,750 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

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 of the old lease's 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.) Do not round intermediate calculations. Round your answer to the nearest cent. $_____

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.) Do not round intermediate calculations. Round your answer to two decimal places. ____%

Question 2:

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%.

	0		1		2		3		4
Project A	-1,000		600		425		250		300
Project B	-1,000		200		360		400		750

What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places.

___ years

What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.

___ years

What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places.

___years

What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.

___ years