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 $611,000, useful life 25 years.
Building B: Lease for 25 years with annual lease payments of $68,000 being made at the beginning of the year.
Building C: Purchase for $659,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,100. Rental payments will be received at the end of each year. Shamrock, Inc. has no aversion to being a landlord.
Calculate the net present value of three buildings, assuming a 11% 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		$enter a dollar amount rounded to 0 decimal places
Building B		$enter a dollar amount rounded to 0 decimal places
Building C		$enter a dollar amount rounded to 0 decimal places

In which building would you recommend that Shamrock, Inc. locate?

Shamrock, Inc. should locate itself in select a building                                                          Building ABuilding BBuilding C.

Present Value of 1

(n) periods	2%	2½%	3%	4%	5%	6%	7%	8%	9%	10%	11%	12%	15%
1	0.98039	0.97561	0.97087	0.96156	0.95238	0.94340	0.93458	0.92593	0.91743	0.90909	0.90090	0.89286	0.86957
2	0.96117	0.95181	0.94260	0.92456	0.90703	0.89000	0.87344	0.85734	0.84168	0.82645	0.81162	0.79719	0.75614
3	0.94232	0.92860	0.91514	0.88900	0.86384	0.83962	0.81630	0.79383	0.77218	0.75132	0.73119	0.71178	0.65752
4	0.92385	0.90595	0.88849	0.85480	0.82270	0.79209	0.76290	0.73503	0.70843	0.68301	0.65873	0.63552	0.57175
5	0.90583	0.88385	0.86261	0.82193	0.78353	0.74726	0.71299	0.68058	0.64993	0.62092	0.59345	0.56743	0.49718
6	0.88797	0.86230	0.83748	0.79031	0.74622	0.70496	0.66634	0.63017	0.59627	0.56447	0.53464	0.50663	0.43233
7	0.87056	0.84127	0.81309	0.75992	0.71068	0.66506	0.62275	0.58349	0.54703	0.51316	0.48166	0.45235	0.37594
8	0.85349	0.82075	0.78941	0.73069	0.67684	0.62741	0.58201	0.54027	0.50187	0.46651	0.43393	0.40388	0.32690
9	0.83676	0.80073	0.76642	0.70259	0.64461	0.59190	0.54393	0.50025	0.46043	0.42410	0.39092	0.36061	0.28426
10	0.82035	0.78120	0.74409	0.67556	0.61391	0.55839	0.50835	0.46319	0.42241	0.38554	0.35218	0.32197	0.24719
11	0.80426	0.76214	0.72242	0.64958	0.58468	0.52679	0.47509	0.42888	0.38753	0.35049	0.31728	0.28748	0.21494
12	0.78849	0.74356	0.70138	0.62460	0.55684	0.49697	0.44401	0.39711	0.35554	0.31863	0.28584	0.25668	0.18691
13	0.77303	0.72542	0.68095	0.60057	0.53032	0.46884	0.41496	0.36770	0.32618	0.28966	0.25751	0.22917	0.16253
14	0.75788	0.70773	0.66112	0.57748	0.50507	0.44230	0.38782	0.34046	0.29925	0.26333	0.23199	0.20462	0.14133
15	0.74301	0.69047	0.64186	0.55526	0.48102	0.41727	0.36245	0.31524	0.27454	0.23939	0.20900	0.18270	0.12289
16	0.72845	0.67362	0.62317	0.53391	0.45811	0.39365	0.33873	0.29189	0.25187	0.21763	0.18829	0.16312	0.10687
17	0.71416	0.65720	0.60502	0.51337	0.43630	0.37136	0.31657	0.27027	0.23107	0.19785	0.16963	0.14564	0.09293
18	0.70016	0.64117	0.58739	0.49363	0.41552	0.35034	0.29586	0.25025	0.21199	0.17986	0.15282	0.13004	0.08081
19	0.68643	0.62553	0.57029	0.47464	0.39573	0.33051	0.27651	0.23171	0.19449	0.16351	0.13768	0.11611	0.07027
20	0.67297	0.61027	0.55368	0.45639	0.37689	0.31180	0.25842	0.21455	0.17843	0.14864	0.12403	0.10367	0.06110

Answer 1

Solution :

Present value of Building A = Cash price of Building = $611,000

Present value of Building B = $68,000 * Cumulative PV Factor at 11% for 25 periods of annuity due

= $68,000 * 9.34814 = $635,674

Present value of Building C = Cash price- Present value of rental income = $659,000 - $6,100 * Cumulative PV Factor at 11% for 25 periods

= $659,000 - $6,100 * 8.42174 = $607,627

The Shamrock Inc. should locate itself in Building C.