Question

Current Attempt in Progress The Sarasota 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, Sarasota has decided to locate a new factory in the Panama City area. Sarasota 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 $619,600, useful life 26 years. Building B: Lease for 26 years with annual lease payments of $70,510 being made at the beginning of the year. Building C: Purchase for $650,100 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,900. Rental payments will be received at the end of each year. The Sarasota Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Sarasota Inc. locate, assuming a 10% cost of funds? (Round factor values to 5 decimal places, eg. 1.25124 and final answer to 0 decimal places, eg. 458,581.) Net Present Value Building A $ Building B $ Building C $ The Sarasota Inc. should locate itself in e Textbook and Media Save for Later Attempts: 0 of 15 used Submit Answer

Answer 1

Requirement 1: Building A Cash price = -$619,600 Building B First Annual Lease payment = $70,510 Present value of annual lease = $70510+ (Annual Lease * PVAF (25 years ,10%)) = $70510+(70510*9.07704) NPV =-$710532 6,50,100 Building C Cash paid $ Less: Present value Of Annual Rent $ ($6900*9.16094) 63,210 NPV $ -5,86,890 Requirement 2: Building C. * Kindly Comment down for any clarifications/ queries and please upvote.