Question

The Flounder 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, Flounder has decided to locate a new factory in the Panama City area. Flounder 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 $619,800, useful life 26 years. Building B: Lease for 26 years with annual lease payments of $71,730 being made at the beginning of the year. Building C: Purchase for $650,100 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,810. Rental payments will be received at the end of each year. The Flounder Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Flounder Inc. locate, assuming a 11% cost of funds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e s. 458,581.)

Answer 1

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A B С D E F G H J K 1 11% 2 3 Cost of funds Life 26 years 4 Building A 5 6 Building B Lease payment 71730 at beginning of the year Building C Cost Less:income NPV 650100 57803.68 7 8 NPV 619800 NPV 675821.74 592296.32 9 10 11 Lowest NPV 592296.32 12 13 Flounder Inc should locate in Building C 14 15

For calculation ref:

A B с D E F G H J 1 2 0.11 Cost of funds Life 3 26 years 4 5 Building A Building B Lease payment 71730 6 at beginning of the year Building C Cost 650100 Less:income =PV(C2,C3,-6810) NPV =J6-17 NPV 619800 NPV =PV(C2,C3-1,-F6)+F6 7 8 9 10 Lowest NPV =MIN(J8,F8,08) 11 12 13 Flounder Inc should locate in =15 14