On 1/12014, Wallgreens Company signed a ten-year non-cancelable contract to leas

Question

On 1/12014, Wallgreens Company signed a ten-year non-cancelable contract to lease a storage facility from Rite Aids Inc. Rite aids inc expects to be able to collect lease payments predictably and does not have any significant uncertainties regarding the amount of costs that it may incur during the lease term. Please also consider the facts outlined below: a. Walgreens is required to make equal rental payments at the beginning of the year for ten years. b. The fair value of the facility as of 1/1/2014 was $4M, but the book value to Rite Aids Holdings was $3.3M. c. The facility has a ten-year economic life and 0 RV. Rite Aid depreciates its facilities on a straight-line basis. d. The title to the storage facility will be transferred to Walgreens at the end of ten years. e. Walgreens has a 11% incremental annual borrowing rate. Rite Aid requires 10% rate of return. Walgreens knows of Rite Aid 10% implicit rate. f. The annual payment includes $10K of executory costs (such as property taxes paid to the local government). Calculate the minimum lease payment that Walgreens would pay per year.

Explanation / Answer

Minimum lease payment that Walgreens would pay per year.

= $4,000,000 /6.14457 = $650981 (PV of Ordinary Annuity Table).

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