Question

Exercise 6-12 The Coronado 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, Coronado has decided to locate a new factory in the Panama City area. Coronado 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 $610,000, useful life 27 years. Building B: Lease for 27 years with annual lease payments of $70,500 being made at the beginning of the year. Building C: Purchase for $656,700 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,570. Rental payments will be received at the end of each year. The Coronado Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Coronado Inc. locate, assuming a 10% cost of funds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 458,581.) Net Present Value . Building A Building B Building C The Coronado Inc. should locate itself in

Answer 1

Solution :

Present value of Building A = Cash price of Building = $610,000

Present value of Building B = $70,500 * Cumulative PV Factor at 10% for 27 periods of annuity due

= $70,500 * 10.16095 = $716,347

Present value of Building C = Cash price- Present value of rental income = $656,700 * $6,570 * Cumulative PV Factor at 10% for 27 periods

= $656,700 - $6,570 * 9.23722 = $596,011

The coronado inc should locate itself in Building C.