Question

Exercise 3-06 Metlock, Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in Western Canada. In order to do so, Metlock has decided to locate a new factory in Kelowna, B.C. Metlock 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 buildings. Building A: Purchase for a cash price of $605,000, useful life 25 years. Building B: Lease for 25 years with annual lease payments of $74,000 being made at the beginning of the year. Building C: Purchase for $655,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,300. Rental payments will be received at the end of each year. Metlock, Inc. has no aversion to being a landlord. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. Calculate the net present value of three buildings, assuming a 11% cost of funds. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to 0 decimal places, e.g. 5,275.) Net present value Building A 605,000 SI Building B $ Building C $ In which building would you recommend that Metlock, Inc. locate? Metlock, Inc. should locate itself in Building Cv

Answer 1

А B 1 Building A $ 605,000 2 Building B$ 691,762 3 Building C $ 601,943

calc:

A B 1 Building A 605000 2 Building B =PV(11%,25,-74000,,1) 3 Building C =655000-PV(11%,25,-6300)

Locate to Building C