Question

Continuing from our PBL questions...

After your first rigorous acquisitions meeting at Berkshire Hathaway, you've been seconded to evaluate two business leases in a famous shopping centre in Australia, Chadstone.

A 200 square meter retail shop space, currently occupied by Louis Vuitton is up to renewal today.

Louis Vuitton wants to renew the lease today and is offering $1.2 mil p.a. in advance for 5 years.

Chadstone property management has another bid for the space by Prada, who wishes to move to LVs space today. In return for not renewing LV's lease, Prada is willing to pay a compensation fee now of $300,000 in addition to offering a premium lease of $1 mil p.a. in arrears for 6 years.

Chadstone has a WACC of 8%. Which tenant should Chadstone pick?

Hint: The WACC can be used as a discount rate and when it is expressed without any period, assume it is per annuum.

The value of LV's proposed lease is:  

The value of Prada's proposed lease is:  

Chadstone should choose

Answer 1

Calculation of Net Present value of Value of LV's Proposed Lease

Year	Cash Flow	PVF @8%	Present Value
a	b	c	d=b*c
0	$1,200,000.00	1	$1,200,000.00
1	$1,200,000.00	0.926	$1,111,111.11
2	$1,200,000.00	0.857	$1,028,806.58
3	$1,200,000.00	0.794	$952,598.69
4	$1,200,000.00	0.735	$882,035.82
		NPV	$5,174,552.21

Based on above table, NPV of LV's proposed Lease = $5,174,552.21

Calculation of NPV of Prada's proposed lease

Year	Cash Flow	PVF @8%	Present Value
a	b	c	d=b*c
0	$300,000.00	1	$300,000.00
1	$1,000,000.00	0.926	$925,925.93
2	$1,000,000.00	0.857	$857,338.82
3	$1,000,000.00	0.794	$793,832.24
4	$1,000,000.00	0.735	$735,029.85
5	$1,000,000.00	0.681	$680,583.20
6	$1,000,000.00	0.630	$630,169.63
		NPV	$4,922,879.66

Based on above table, NPV of LV's proposed Lease = $4,922,879.66

Which Lease to choose

From the above two tables, it is clear that NPV of LV's proposed lease is much more than that proposed by Prada.

Net benefit of selecting Prada's lease = $5,174,552.21 - $4,922,879.66 = $ 251,672.55

Therefore, LV's proposed lease should be selected

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