Wyndham Stores operates a regional chain of upscale department stores. The company is going to open another store soon in a prosperous and growing suburban area. In discussing how the company can acquire the desired building and other facilities needed to open the new store, Harry Wilson, the companys marketing vice president, stated, I know most of our competitors are starting to lease facilities, rather than buy, but I just cant see the economics of it. Our development people tell me that we can buy the building site, put a building on it, and get all the store fixtures we need for $12 million. They also say that property taxes, insurance, maintenance, and repairs would run $200,000 a year. When you figure that we plan to keep a site for 15 years, thats a total cost of $15 million. But then when you realize that the building and property will be worth at least $5 million in 15 years, thats a net cost to us of only $10 million. Leasing costs a lot more than that." Im not so sure, replied Erin Reilley, the companys executive vice president. Guardian Insurance Company is willing to purchase the building site, construct a building and install fixtures to our specifications, and then lease the facility to us for 15 years for an annual lease payment of only $1 million. Thats just my point, said Harry. At $1 million a year, it would cost us $15 million over the 15 years instead of just $10 million. And what would we have left at the end? Nothing! The building would belong to the insurance company! Ill bet they would even want the first lease payment in advance. Thats right, replied Erin. We would have to make the first payment immediately and then one payment at the beginning of each of the following 14 years. However, youre overlooking a few things. For one thing, we would have to tie up a lot of our funds for 15 years under the purchase alternative. We would have to put $6 million down immediately if we buy the property, and then we would have to pay the other $6 million off over three years at $2 million a year. But that cost is nothing compared to $15 million for leasing, said Harry. Also, if we lease, I understand we would have to put up a $580,000 security deposit that we wouldnt get back until the end. And besides that, we would still have to pay all the repair and maintenance costs just like we owned the property. No wonder those insurance companies are so rich if they can swing deals like this. Well, Ill admit that I dont have all the figures sorted out yet, replied Erin. But I do have the operating cost breakdown for the building, which includes $89,000 annually for property taxes, $70,000 for insurance, and $41,000 for repairs and maintenance. If we lease, Guardian will handle its own insurance costs and will pay the property taxes, but well have to pay for the repairs and maintenance. I need to put all this together and see if leasing makes any sense with our 10% before-tax required rate of return. The president wants a presentation and recommendation in the executive committee meeting tomorrow. (Ignore income taxes.) View Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.

8B-1 8B-2 a. Calculate the net present value if the investment of the property is leased and fill out the chart below. (Enter your answers in dollars not millions. Round PV discount factor(s) to 3 decimal places. Any cash outflows should be indicated by a minus sign. Round your intermediate calculations to the nearest dollar amount.)

b. Should Wyndham Stores lease or buy the new store?

EXHIBIT 8B-1 Present Value of $1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 2 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.640 3 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512 4 0.855 0.823 0.792 0.763 0.735 0.708 0.6830.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.386 0.370 0.355 0.341 0.328 5 0.822 0.784 0.747 6 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.262 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.4520.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210 8 0.731 0.677 0.627 0.582 0.540 0.502 0467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0.191 0.179 0.168 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180 0.167 0.155 0.144 0.134 10 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.149 0.137 0.126 0.116 0.107 11 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.123 0.112 0.103 0.094 0.086 0.168 0.152 0.137 0.124 0.112 0.102 0.092 0.083 0.076 0.069 13 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.084 0.075 0.068 0.061 0.055 14 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035 12 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 16 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.1 17 18 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.1530.130 0.1 41 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.036 0.032 0.028 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018 19 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.014 20 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.012 11 0 21 0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0.0930.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.007 23 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 0.010 0.009 0.007 0.006 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005 25 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004 24 26 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 27 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.002 28 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002 29 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002 30 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.003 0.003 0.002 0.002 0.001 40 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000