Question

The Pronghorn 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, Pronghorn has decided to locate a new factory in the Panama City area. Pronghorn 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 $619,800, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,730 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 $6,810. Rental payments will be received at the end of each year. The Pronghorn Inc. has no aversion to being a landlord.

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In which building would you recommend that The Pronghorn Inc. locate, assuming a 11% 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 Pronghorn Inc. should locate itself in

select a building                                                          Building CBuilding BBuilding A

Answer 1

Solution :

Present value of Building A = Cash price of Building = $619,800

Present value of Building B = $71,730 * Cumulative PV Factor at 11% for 26 periods of annuity due

= $71,730 * 9.42174 = $675,821

Present value of Building C = Cash price- Present value of rental income = $650,100 * $6,810 * Cumulative PV Factor at 11% for 26 periods

= $650,100 - $6,810 * 8.48806 = $592,296

The Pronghorn Inc. should locate itself in Building C.