Question

The Nash 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, Nash has decided to locate a new factory in the Panama City area. Nash 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 $620.000, useful life 27 years. Building B: Lease for 27 years with annual lease payments of $71,170 being made at the beginning of the year. Building C. Purchase for $657.500 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6.200. Rental payments will be received at the end of each year. The Nash Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Nash Inc. locate, assuming a 11% cost of funds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to decimal places, eg. 458,581.) Net Present Value Building A $ Building B $ Building $ The Nash Inc. should locate itself in

Answer 1

	Net present value
Building A	620000
Building B	675265
Building C	604504
The Nash inc should locate itself in Building C

Workings:
Building B
Annual payments	71170
X PV factor	9.48806	=1+(1-(1.11)^-26)/0.11
Net present value	675265
Building C:
Annual rental	6200
X PV factor	8.54780	=(1-(1.11)^-27)/0.11
Present value	52996
Net present value	604504	=657500-52996