Question

Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below:
Square Feet Expected Monthly
Business Name Required Cash Flow
Videos Now 4,000 70,000
Gords Gym 3,500 52,500
Pizza Warehouse 2,500 52,500
Super Clips 1,500 25,500
30 1/2 Flavors 1,500 28,500
S-Mart 12,000 180,000
WalVerde Drugs 6,000 147,000
Multigular Wireless 1,000 22,250
If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses should you lease and why?

Answer 1

Answer:

I would like to lease spaces to the following businesses:

                                Square Feet    Expected Monthly

S-Mart                            12,000                $180,000

WalVerde Drugs            6,000                   147,000

Videos Now                   4,000                    70,000

They have the highest monthly expected cash flows to be able to pay the monthly rent.  Another reason is that the variable part of the rent depends on each business's monthly gross sales.  The higher the gross sales, the higher the rent.  They also require the highest square space on which the fixed element of the rent depends.

Explanation:

a) Data and Calculations:

                                  Square Feet    Expected Monthly

Business Name            Required          Cash Flow

Videos Now                     4,000               $70,000

Gords Gym                      3,500                 52,500

Pizza Warehouse            2,500                 52,500

Super Clips                      1,500                 25,500

30 1/2 Flavors                  1,500                 28,500

S-Mart                            12,000                180,000

WalVerde Drugs            6,000                 147,000

Multigular Wireless        1,000                  22,250

Space available for leasing = 15,000 square feet

S-Mart                            12,000                $180,000

WalVerde Drugs            6,000                   147,000

Videos Now                   4,000                    70,000