Question

1.) The Tamarisk 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, Tamarisk has decided to locate a new factory in the Panama City area. Tamarisk 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 $610,000, useful life 27 years.

Building B: Lease for 27 years with annual lease payments of $70,500 being made at the beginning of the year.

Building C: Purchase for $656,700 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,570. Rental payments will be received at the end of each year. The Tamarisk Inc. has no aversion to being a landlord.

In which building would you recommend that The Tamarisk Inc. locate, assuming a 10% 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

2.) $52,610 payable at the end of the seventh, eighth, ninth, and tenth periods at 11%

What is the Present Value?

3.) Marin Inc. has $652,920 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $97,304 at the end of each year for 10 years, and the other is to receive a single lump-sum payment of $2,027,870 at the end of the 10 years. Which alternative should Marin select? Assume the interest rate is constant over the entire investment.

Answer 1

Net Present value Buildings A Buildings B Buildings C $610,000 $716,347 $596,011 Conclusion: Buildings C is recommended since present value of cash outflows is lower Buildings A Payment Year PV factor at 10% 1.000000 PV of Cash outflows $610,000 Cash price $610,000) 1 Buildings B PV factor PV of Cash Payment Year at 10% outflows Lease for 27 years $70,500 0-26 10.16095 $716,347 PV factor taken for 26 years + 1 since payments are made at beginning of the year Buildings C Payment Year PV factor at 10% 1.000000 PV of Cash outflows $656,700 $656,700 0 Cash price Less: Rental cost Net annual rental Total Present value of outflows -$6,570 1-27 9.237221 -$60,689 $596,011 Amount Year 2) 7 py factor at 11% 0.48165841 0.4339265 0.39092477 0.35218448 Amount payable =$52,610 $52,610 PV factor from year 7 to 10 $52,610 PV factor = 1.65869 $52,610 PV amount = $52,610* 1.65869 $52,610 PV = $87,264 Present value 8 PV of Cash outflows $25,3401 $22,829 $20,567 $18,528 $87,264 9 10 3) Alternative 1 Returns per year Total years Total returns $97,304 10 $973,040 Alternative 2 Lump sum received at the end of 10th year $2,027,870 Alternative 2 should be preferred Assuming rate of interest is 11% Returns PV factor at 11% 5.88923 0.35218 Present Value $573,046 $714,184 Higher returns Alternative 1 Alternative 2 $97,304 $2,027,870