Info For question

• baba.com has entered in an agreement with mexico City Council on 1st January, 2021 (i.e. at t=0) to lease an existing student residential hall
• The payment periods, given by t, are counted in months. For example, since t=0 represents 1st January, 2021; t=1 represents 1st February, 2021 and so on.
• The lease agreement is for 40 years till and including 1st January, 2061 (i.e. t=480).
• Due to the high demand for accommodation in student residential halls in London, this residential hall will be fully occupied at all times.
• n in student residential halls in mexico, this residential hall will be fully occupied at all times.
• Student.com has to make a monthly payment of 10,000 on the 1st day of each month to mexico City Council till the end of the agreed lease period (i.e. till and including t=480).
• The first payment Student.com has to make to mexico City Council is on 1st February, 2021 (i.e. at t=1).

Question 1

• The lease agreement expires on 31st December, 2060. On 1st January of 2061, baba.com will become the owner of the residential hall.
• In other words, baba.com will collect rents in perpetuity and after the lease period ends (i.e. from t=481 onwards) baba.com does not have to pay anything to mexico City Council.
• The number of beds remains at 100 and baba.com will charge 250 per month for each bed as rent forever (i.e. in perpetuity).
• The first rents will be collected on 1st February, 2021 (i.e.at t=1).

Question: What is the NPV of this lease agreement for baba.com? Assume a monthly discount rate of 1%.

Question 2

• The lease agreement expires on 31st December, 2060. On 1st January of 2061, baba.com will become the owner of the residential hall.
• In other words, baba.com will collect rents in perpetuity and after the lease period ends (i.e. from t=481 onwards) Student.com does not have to pay anything to mexico City Council.
• The number of beds remains at 100.
• The first rents will be collected on 1st February, 2021 (i.e.at t=1).
• Both the rent and the monthly payment to the mexico City Council will increase by 0.7% per month during the lease period. That is, the rent per bed and the payment to the city council to be paid on 1st of March, 2021 (i.e. at t=2) will be 0.7% higher than the rent per bed and the payment made to mexico City Council on 1st February, 2021 (i.e. at t=1) and so on.
• Although the payments to the city council will stop after the lease period ends (i.e. from t=481 onwards), the rent will keep growing by 0.7% per month in perpetuity.

Question: What is the NPV of this lease agreement for baba.com? Assume a monthly discount rate of 1%.