Question

Exercise 6-12 The Martinez Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the to do so, Martinez has decided to locate a new factory in the Panama City area. Martinez will either buy or lease a site depending upor advantageous. The site location committee has narrowed down the available sites to the following three very similar buildings that will Building A: Purchase for a cash price of $618,100, useful life 26 years. Building B: Lease for 26 years with annual lease payments of $70,340 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 rental of $6,540. Rental payments will be received at the end of each year. The Martinez Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Martinez Inc. locate, assuming a 12% cost of funds? (Round factor values to 5 de e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Net Present Value $ Building A Building B $ Building $ The Martinez Inc. should locate itself in

Answer 1

Solution :

Present value of Building A = Cash price of Building = $618,100

Present value of Building B = $70,340 * Cumulative PV Factor at 12% for 26 periods of annuity due

= $70,340 * 8.84314 = $622,026

Present value of Building C = Cash price- Present value of rental income = $653,200 - $6,540 * Cumulative PV Factor at 12% for 26 periods

= $653,200 - $6,540 * 7.89566 = $601,562

The Martinez Inc. should locate itself in Building C.