Question

Shamrock, Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in Western Canada. In order to do so, Shamrock has decided to locate a new factory in Kelowna, B.C. Shamrock 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 buildings. Building A: Purchase for a cash price of $605,000, useful life 25 years. Building B: Lease for 25 years with annual lease payments of $73,000 being made at the beginning of the year. Building C: Purchase for $679,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $9,000. Rental payments will be received at the end of each year. Shamrock, Inc. has no aversion to being a landlord. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. Calculate the net present value of three buildings, assuming a 10% cost of funds. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answers to 0 decimal places, e.g. 5,275.) Net present value Building A Building B $ Building C $

Answer 1

	Net present value
Building A	605000
Building B	728886
Building C	597307

Workings:
Building B
Annual payments	73000
X PV factor	9.98474	=1+((1-(1.10)^-24)/0.10)
Net present value	728886
Building C:
Annual rental	9000
X PV factor	9.07704	=(1-(1.10)^-25)/0.10
Present value	81693
Net present value	597307	=679000-81693