A store is under consideration with a ten-year life and with expenses of $225,000 per year and will likely produce revenue of $775,000 per year. You can lease the location for $500,000 per year for ten years with payments at the beginning of each year, or you can purchase the location for $3,000,000 with financing of a $3,000,000 loan. The salvage value is zero with a straight line depreciation expense of $300,000 per year for each of the ten years. You can obtain financing with debt at an interest rate of 10 percent, or from cash which is earning you currently 10 percent. The business pays taxes at a rate of 40 percent.

a. What is the net present value of the store if you used a purchase?

b. What is the net present value of the store if you used a lease?

c. Which do you choose and why?