Question

The Blue 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, Blue has decided to locate a new factory in the Panama City area. Blue 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 $616,000, useful life 25 years.

Building B: Lease for 25 years with annual lease payments of $70,700 being made at the beginning of the year.

Building C: Purchase for $654,700 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,820. Rental payments will be received at the end of each year. The Blue Inc. has no aversion to being a landlord.

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In which building would you recommend that The Blue Inc. 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		$enter a dollar amount rounded to 0 decimal places
Building B		$enter a dollar amount rounded to 0 decimal places
Building C		$enter a dollar amount rounded to 0 decimal places

The Blue Inc. should locate itself in

select a building Building BBuilding ABuilding C

Answer 1

Solution :

Present value of Building A = Cash price of Building = $616,000

Present value of Building B = $70,700 * Cumulative PV Factor at 12% for 25 periods of annuity due

= $70,700 * 8.78432 = $621,051

Present value of Building C = Cash price- Present value of rental income = $654,700 - $6,820 * Cumulative PV Factor at 12% for 25 periods

= $654,700 - $6,820 * 7.84314 = $601,210

The Blue Inc. should locate itself in Building C.