Question

BLANK Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the Sunbelt. In order to do so, BLANK has decided to locate a new factory in the Panama City area. BLANK will either buy or lease a site depending upon which is more advantageous. The site location committee has narrowed down the available sites to the following three very similar buildings that will meet their needs.

Building A: Purchase for a cash price of $618,700, useful life 28 years.

Building B: Lease for 28 years with annual lease payments of $70,420 being made at the beginning of the year.

Building C: Purchase for $653,900 cash. This building is larger than needed; however, the excess space can be sublet for 28 years at a net annual rental of $6,460. Rental payments will be received at the end of each year. BLANK Inc. has no aversion to being a landlord.


In which building would you recommend that BLANK locate, assuming a 12% cost of funds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

		Net Present Value
Building A		$
Building B		$
Building C		$

BLANK should locate itself in which building?

Answer 1

The building that has the lowest present value of purchase cost should be recommended.

Building A:

Present value of the purchase cost = $618,700

Building B:

Present value of the purchase cost

= $70,420 x Present value of annuity due (12%, 28)

=$70420*8.94255

=$629734.37

Building C:

Present value of purchase cost

= $653,900 - [$6,460 x Present vale of normal annuity (12%, 28)]

= $653,900 - ($6,460 x 7.98442)

= $602320.65

Since Building C has the lowest present value of purchase cost, it must be recommended.

BLANK should locate itself in Building C.

Please give positive rating