Question

Local News 4/16/2020: "Google has bought over 50 properties in Sunnyvale over the past 3 years, extending a shopping spree that totals in the billions of dollars in that Silicon Valley city alone." Why do you think Google went on such a shopping spree? What made it want to purchase so many properties instead of renting? What effects will these purchases have on Google's financial statements?

Answer 1

Google is cash rich company which wants to effectively use its cash to increase its return on investment. Since Google is a growing company they want offices for future growth and to expand the business operations. In terms of taking office on rent or buying office, the company would have done a Rent vs. Buy evaluation by comparing the present value of rentals and the purchase cost. The rentals keep increasing year on year basis due to higher demand of business to grow and expand. Hence if the net present value of investing in office buildings is lower than the present value of rental cost it makes sense for Google to invest in office buildings and save rental cost which again in turn will improve its cash position in the long run.

Affects on Financial statements

· No rental expense in Income statement

· Depreciation expense on Office buildings will be charged to Income statement

· Initial cash outflow for investment will reduce cash balance and will increase Property, Plant and Equipment

· Long term – Cash inflows will be higher which increases cash balance.