Rent or Own $($Old Exam Question$)$ Albertsons has decided to open a new store in Sisters, Oregon and must now decide whether to buy or rent the building they intend to occupy in years $1-8.$ If they buy the building, they must pay $$10$ million today $($year $0),$ must depreciate the building to a book value of $$0$ using straight$-$line depreciation over ten years $($years $1-10),$ and will have the option to sell the building for $$3$ million in year $9,$ after $8$ years worth of depreciation. $($In year $8,$ they intend to build an Albertsons Grande, so they will only generate cash flows from operation in this building in years $1-8.)$ Alternatively, Albertsons can rent the building in years $1-8$ at an annual $($fixed$)$ cost of $$1\mathrm{.}5$ million. Regardless of whether they rent or own the building, they expect to generate annual revenues of $$15$ million, annual variable

costs of $$11$ million, and annual fixed costs $($excluding rent$)$ of $$2$ million. When answering the questions below, please assume a corporate tax rate of $40\%$ and an annual discount rate of $8\%.$ When answering questions $($b$)$ and $($c$),$ please clearly state all of the relevant cash flows in years $0-9.($a$)$ If Albertsons buys the building, what is the salvage value $($after$-$tax cash flow$)$ associated with selling the building for $$3$ million in year $9?($b$)$ If Albertsons buys the building, what is the maximum NPV associated with the opening of the new store?$($c$)$ If Albertsons rents the building, what is the NPV of opening the new store? Is this a better or worse option than buying the building? $($d$)$ For what annual rent payment would Albertsons be indifferent between buying and renting the building? Hint: You should solve all of the other problems on the exam and then come back to this one.