Question

The Tamarisk 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, Tamarisk has decided to locate a new factory in the Panama City area. Tamarisk 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 $618,300, useful life 27 years. Building B: Lease for 27 years with annual lease payments of $71,360 being made at the beginning of the year. Building C: Purchase for $651,500 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,090. Rental payments will be received at the end of each year. The Tamarisk Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Tamarisk Inc. locate, assuming a 11% cost of funds? (Round factor values to 5 decimal places, es, 1.25124 and final answer to decimal places, eg. 458,581.) Net Present Value Building A $ Building B $ Building $ The Tamarisk Inc. should locate itself in

Answer 1

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А B с D 1 w N Cost of funds 11% 4 5 Building A NPV 618300 6 7 8 Building B NPV 9 677067.84 10 11 Building C 12 Cost 13 Less:income NPV 651500 52056.10 599443.90 14 15 16 Lowest NPV 599443.90 17 18 Tmarisk should locate in Building C 19

For calculation ref:

А B с 1 N 3 3 3 Cost of funds 0.11 4 5 Building A NPV 618300 6 7 8 Building B NPV 9 =PV(C3,(27-1),-71360)+71360 10 11 12 13 14 15 Building C Cost Less:income NPV 651500 =PV(11%,27,-6090) =C12-C13 = Lowest NPV 16 17 =MIN(C14,C9,C6) 18 Tmarisk should locate in =B11 19