Question

The Coronado 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, Coronado has decided to locate a new factory in the Panama City area. Coronado 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 $616,000, useful life 26 years. Building B: Lease for 26 years with annual lease payments of $70,880 being made at the beginning of the year. Building C: Purchase for $650,600 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,110. Rental payments will be received at the end of each year. The Coronado Inc. has no aversion to being a landlord. Click here to view factor tables In which building would you recommend that The Coronado Inc locate, assuming a 10% cost of funds? (Round factor values to 5 decimal places, eg. 1.25124 and final answer to decimal places, eg. 458,581) Net Present Value Building A TA $ Building B $ $ Building C $ The Coronado Inc. should locate itself in

Answer 1

• Net Present Value Building A = Cash price of Building = $616,000

• Net Present value of Building B = $70,880 * Cumulative PV Factor at 10% for 26 periods of annuity due

= $70,880 * 10.07704 = $714,261

• Net Present value of Building C = Cash price- Present value of rental income = $650,660 - ($6,110 * Cumulative PV Factor at 10% for 26 periods)

  = $650,660 - ($6,110 * 9.160945) = $594,687

• The Coronado Inc should locate itself in Building C