Question

Exercise 6-12 The Riverbed 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, Riverbed has decided to locate a new factory in the Panama City area. Riverbed 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 $71,570 being made at the beginning of the year.

Building C: Purchase for $650,800 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,890. Rental payments will be received at the end of each year.

The Riverbed Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Riverbed Inc. locate, assuming a 11% cost of funds?

Building A:_________

Building B:_________

Building C:_________

Answer 1

Building A	610000
Building B	679060	=71570*9.48806
Building C	591906	=650800-(6890*8.54780)
9.48806 is the PV factor of $1 annuity due for n=27,i=11%
8.54780 is the PV factor of $1 annuity for n=27,i=11%