Question

(Click the icon to view the Present Value of $1 table.) Agata Bertina wants to open a new factory in New Jersey. The company can either purchase or lease the factory. There are three options available for Agata Bertina: i (Click the icon to view the options.) (Click the icon to view the Future Value of $1 table.) (Click the icon to view the Future Value of an Ordinary Annuity table.) (Click the icon to view the Future Value of an Annuity Due table.) (Click the icon to view the Present Value of an Ordinary Annuity table.) (Click the icon to view the Present Value of an Annuity Due table.) Requirement Interest is compounded annually. Which option should Agata Bertina choose given a 3% interest rate? 3 First, calculate the present value of each option. (Ignore any depreciation expense for purposes of this problem. Use the present value and future value tables, the formula method, a financial calculator, or a spreadsheet for your calculations. If using present and future value tables or the formula method, use factor amounts rounded to five decimal places, X.XXXXX. Round any intermediary currency calculations and your final answer to the nearest cent, $X.XX.) Present value i Option 1 Option 2 More Info - X Option 3 Agata Bertina should select because this option results in the present value. 1. Purchase a factory with a useful life of 30 years today for $350,000 in cash. This factory has no additional space for rent. 2. Lease a factory with annual lease payments of $70,000 for 30 years. Payments are made at the beginning of each year. 3. Purchase a factory with a useful life of 30 years today for $420,000. In addition, the company can rent some additional space for annual rent of $12,000. Assume Agata Bertina would receive the rental payments at the end of each year. Print Done

Answer 1

Solution :

Present value:

Option 1 = Cash price of factory = $350,000

Option 2 = $70,000 * Cumulative PV factor at 3% for 30 periods of annuity due

= $70,000 * 20.18845 = $1,413,191.50

Option 3 = Cash price - Present value of rental payments

= $420,000 - $12,000 * cumulative PV factor at 3% for 30 periods of ordinary annuity

= $420,000 - $12,000 * 19.60044

= $184,794.72

Agata Bertina should select option 3 because this option results in lowest present value.