Question

The Flounder 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, Flounder has decided to locate a new factory in the Panama City area. Flounder 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 $610,600, useful life 27 years. Building B: Lease for 27 years with annual lease payments of $70,870 being made at the beginning of the year. Building C: Purchase for $657,200 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,110. Rental payments will be received at the end of each year. The Flounder Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Flounder Inc. locate, assuming a 12% 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 $ -610600 Building B Building C $ $ The Flounder Inc. should locate itself in

Answer 1

Building A
	Cash paid = -$-610600
Building B
	First payment made now is = $70870
	And Annual payment for 26 years
	Present value of annual lease = $70870 + (Annual Lease * PVAF (26 years ,12%))
			=$70870+(70870*7.89566)
	NPV		$       -6,30,435
Building C
	Cash paid			$      6,57,200
	Less:
	Present value Of Annual Rent			$          48,529
	($6110*7.94255)
	NPV			$     -6,08,671
Should be located itself in Building C