Capital Budgeting

I am interested in acquiring a cosmetics store at the Monroeville Mall, in Monroeville, PA (a suburb of Pittsburgh) for the purpose of converting it to a costume jewelry store. The store is ideally located at center court. The landlord has proposed that the owner of the store would be willing to accept $200,000 for his leaseholds and fixtures, with the landlord permitting the assignment of the existing lease to me with a remainder of five years left on the lease.

In negotiating the deal with the landlord, they have agreed to an extension of the existing lease for another three years, but with no assurance of any extension of lease beyond that. Thus, the landlord has essentially offered to permit me to operate under the existing lease, as amended by the extension, for eight years. After visiting the mall and evaluating traffic, competition, etc., I projected initial after-tax cash flows of $60,000 with anticipated compound annual growth of 4% per year.

I have always used a 20% cap rate as a reasonable basis for any minimum return I would seek from a new location or renewal of an existing location. In addition, the cost to immediately convert the location to a costume jewelry store would run approximately $100,000 (depreciation and leasehold amortization are already factored into the after-tax cash flows). Our initial inventory requirements were estimated at $60,000.

As the deal stands, should I acquire the store? If not, at what amount would you suggest that I offer the existing owner (and is there an alternate negotiating posture I could take with the present owner to enhance value, given that the $200,000 seems to be set in stone)?