Question

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Windsor, Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in Western Canada. In order to do so, Windsor has decided to locate a new factory in Kelowna, B.C. Windsor 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 buildings. Building A: Purchase for a cash price of $630,000, useful life 25 years. Building B: Lease for 25 years with annual lease payments of $71,000 being made at the beginning of the year. Building C: Purchase for $685,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $8,000. Rental payments will be received at the end of each year. Windsor, Inc. has no aversion to being a landlord. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Calculate the net present value of three buildings, assuming a 12% cost of funds. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to o decimal places, e.g. 5,275.) Net present value Building A S Building B 5 Building C s In which building would you recommend that Windsor, Inc. locate? Windsor, Inc. should locate itself in
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Answer 1

Building A
	Cash paid = -$630000
Building B
	First payment made now is = $71000
	And Annual payment for 25 years
	Present value of annual lease = $71000 + (Annual Lease * PVAF (24 years ,12%))
			=$71000+(71000*7.78432)
	NPV		=-$623687
Building C
	Cash paid			$         6,85,000
	Less:
	Present value Of Annual Rent			$             62,745
	($8000*7.84314)
	NPV			$        -6,22,255
The Windsor locates itself in Building C.
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