For the DCF spreadsheet, use the information provided in the case study and conduct a lease vs. buy analysis on a after-tax basis and using the Income Statement approach. Please feel free to make assumptions if needed (e.g. regarding the roof replacement).

Business Assumptions:

Sales: In 2012, Statons sales were $223million. Over the next 5 years, sales are expected to increase by 5% per year and then increase by 3% for the next 5 years.

Cost of Goods Sold (COGS): Cost of goods sold are expected to remain at 40% of total sales for the next 10 years.

Business expenses: Non-real estate business expenses are expected to be 11.5% of total sales for the next 10 years.

Income tax: The corporate income tax for Staton is 35%. Capital gains tax is 15%.

Discount rate: Staton requires a return of 15% (after tax).

Lease option:

Assume a 10-year NNN lease with occupancy cost of $4.5 per SF ($3/SF rent; operating expenses of $1.5/SF) and a 3% inflation adjustment every 3 years.

Buy option:

Assume a purchase price of $4,048,300. The building value represents 80% of the purchase price and a straight-line depreciation over 39 years should be used.

The operating expenses per SF are the same as for the lease option.

Assume that Staton is not interested in full recourse short-term debt financing option and decides to finance the acquisition with a 75% LTV mortgage at 5% for 25 years (monthly compounding, fully amortizing). Assume no closing costs.

The firm expects to sell the building in year 10. The sales price for the building is expected to be $5,985,000 in year 10. Assume no selling costs.