Question

Exercise 6-12 The Sarasota 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, Sarasota has decided to locate a new factory in the Panama City area. Sarasota 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 $613,000, useful life 26 years. Building B: Lease for 26 years with annual lease payments of $71,950 being made at the beginning of the year. Building C: Purchase for $655,100 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,900. Rental payments will be received at the end of each year. The Sarasota Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Sarasota 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 to Building B Building C The Sarasota Inc. should locate itself in > Click if you would like to Show Work for this question: Open Show Work

Answer 1

Answer

Net Present Value
Building A	$        613,000
Building B	$        636,264
Building C	$ 600620

The Sarasota Inc. should locate itself in Building C

Detailed workings

Net Present Value of Building A = $613000 (Present Cost)

Present Value of Building B
	Year	Amount	PV @ 12%	Present Value
First Payment	0	71950	1	71950
1 to 25 Annual int payments	1-25	$          71,950	7.84314	$          564,314
Net Present Value				$          636,264
Present value of Building C
	Year	Amount	PV @ 12%	Present Value
Purchase Price	0	$        655,100	1.00000	$          655,100
1 to 26 Annual Rental Income	1-26	$          (6,900)	7.89566	$          (54,480)
Net Present Value		.		$          600,620