Question

help please.

Exercise 6-12 The Buffalo 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, Buffalo has decided to locate a new factory in the Panama City area. Buffalo 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 $613,700, useful life 27 years Building B: Lease for 27 years with annual lease payments of $70,100 being made at the beginning of the year Building C: Purchase for $659,100 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,470. Rental payments will be received at the end of each year. The Buffalo Inc. has no aversion to being a landlord Click here to view factor tables In which building would you recommend that The Buffalo 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 613700 Building B Building C The Buffalo Inc. should locate itself in Open Show Work Click if you would like to Show Work for this question:

Answer 1

	Net Present value
Building A	613700
Building B	623586
Building C	607712
The Buffalo inc should locate itself in Building C
The amount can alternatively be written with a minus sign.
Workings:
Building B:
Annual lease payments	70100
X PV factor	8.89566	=1+(1-(1.12)^-26)/0.12
Net Present value	623586
Building C:
Annual rental	6470
X PV factor	7.94255	=(1-(1.12)^-27)/0.12
Present value of Annual rental	51388
Cash price	659100
Less: Present value of Annual rental	51388
Net Present value	607712