1. Fresh's Grocery Stores, Ltd is considering the purchase of one of two large structures of similar layout and area in the middle of a commercial district in the city of Hollering. Freshe's intends to use the one-level space to open a new grocery store that it expects to generate a free cash flow of $10.5 million in year one. Freshe's expects the FCF to grow by 9% per year for the 20-year project's life. The current price of the structure is $145 million. Freshe's estimates that the value of the structure will grow by 3.60% per year for the coming twenty years. Assume Freshe's can depreciate the structure on a straight line basis for a book value of zero over a useful life of 25 years. Freshe's WACC for new store locations is 14% and its marginal tax rate is 25%.
2. Calculate the NPV of the proposed new store based on the estimates of Freshe's managers.
3. What mistake could Freshe's managers have made in their project evaluation in part (a)?

c. One of the managers visited the identical structure next door and learned that the business operating it pays $29 million in rent per year, based on a 20- year contract. With that piece of information, she corrects the mistake committed in part a by assuming Freshe's will rent the store rather than buy it. The side effect of this calculation will be losing from the FCF the tax benefit of depreciation expense (0.25*Dep). Assuming the growth rate in FCF stays at 9%, calculate the new NPV that she should obtain for the project based on this last information