Question

6-12

The Windsor 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, Windsor has decided to locate a new factory in the Panama City area. Windsor 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 $610,600, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,980 being made at the beginning of the year.

Building C: Purchase for $653,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,050. Rental payments will be received at the end of each year. The Windsor Inc. has no aversion to being a landlord.

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In which building would you recommend that The Windsor Inc. locate, assuming a 10% 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		$enter a dollar amount rounded to 0 decimal places
Building B		$enter a dollar amount rounded to 0 decimal places
Building C		$enter a dollar amount rounded to 0 decimal places

The Windsor Inc. should locate itself in

select a building Building CBuilding BBuilding A

Answer 1

The net present value of building A is -$610,600 as there is no cash inflow and only cash outflow
Calculate net present value of building B
NPV	Annual lease payment*PV of annuity due of $1
NPV	71980*10.07704
NPV	$725,345.34
Thus, net present value of building B is -$725,345.34
Calculate net present value of building C
NPV	-653200 + 6050*9.16095
NPV	-$597,776.25
Thus, net present value of building C is -$597,776.25
Company should locate itself in building C as cash outflow is lower