11-10 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2. 3 4 5 H + + + H Project 1 - $200 $75 $75 $75 $190 $190 Project 2 - $650 $250 $250 $125 $125 $125 Which project would you recommend? Explain. 11-18 NPV AND IRR 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 $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). a. Should the new lease be accepted? (Hint: Make sure you use 1% per month.) b. If the store owner decided to bargain with the mall's owner over the new lease pay- ment, 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.) c. 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.)