# Required a should sharon accept the new lease hint be

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a. Should Sharon accept the new lease? (Hint: Be sure to use 1 percent per month.) b. Suppose Sharon decided to bargain with the mall’s owner over the new lease payment. What new lease payment would make Sharon indifferent between the new and the old leases? (Hint: Find FV of the first 9 payments at t _ 9, then treat this as the PV of a 51- period annuity whose payments represent the incremental rent during Months 10 to 60.) c. Sharon is not sure of the 12 percent cost of capital—it could be higher or lower. At what nominal cost of capital would Sharon be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams, and find the IRR of this difference stream.) QUESTION 6 (BH-542) Your division is considering two investment projects, each of which requires an up-front expenditure of \$25 million. You estimate that the cost of capital is 10 percent and that the investments will produce the following after-tax cash flows (in millions of dollars): Required a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10 percent, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5 percent, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15 percent, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10 percent, what is the modified IRR (MIRR) of each project? QUESTION 7 Year Project A Project B 1 5 20 2 10 10 3 15 8 4 20 6
The treasurer of Orient Express, Inc., has projected the cash flows of projects A, B, and C as follows. Suppose the relevant discount rate is 12 percent a year. Year Project A Project B Project C 0 (100,000) (200,000) (100,000) 1 70,000 130,000 75000 2 70,000 130,000 60,000 Required a. Compute the NPVs for each of the three projects. b. Compute the profitability indices for each of the three projects. c. Suppose these three projects are independent. Which projects should the treasurer accept based on the profitability index rule? d. Suppose these three projects are mutually exclusive. Which project should the treasurer accept based on the profitability index rule? e. Suppose budget for these projects is \$300,000. The projects are not divisible. Which projects should the treasurer accept? QUESTION 8 (BM- 27) A parcel of land costs \$500,000. For an additional \$800,000 you can build a motel on the property. The land and motel should be worth \$1,500,000 next year. Suppose that common stocks with the same risk as this investment offer a 10 percent expected return. Would you construct the motel? Why or why not? QUESTION 9 (BM-28) In Section 2.1, we analyzed the possible construction of an office building on a plot of land appraised at \$50,000. We concluded that this investment had a positive NPV of \$7,143 at a discount rate of 12 percent. Suppose E. Coli Associates, a firm of genetic engineers, offers to purchase the land for \$60,000, \$30,000 paid immediately and \$30,000 after one year. United States government securities maturing in one year yield 7 percent.

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