Question

Exercise 6-12

The Tamarisk 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, Tamarisk has decided to locate a new factory in the Panama City area. Tamarisk 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 $611,000, useful life 25 years.

Building B: Lease for 25 years with annual lease payments of $71,370 being made at the beginning of the year.

Building C: Purchase for $657,400 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,800. Rental payments will be received at the end of each year. The Tamarisk Inc. has no aversion to being a landlord.

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In which building would you recommend that The Tamarisk Inc. locate, assuming a 12% cost of funds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

		Net Present Value
Building A		$
Building B		$
Building C		$

The Tamarisk Inc. should locate itself in

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

G | Η Answer 2 In the given question, we have to calculate the cost of present value of the given 3 options 3 4 Building A = present value of cost = $ 611000 5 7 Building B 8 Present value = annual lease payment * (((1-(1.12)^-24)/.12) +1) 9 = 71370 * (((1-(1.12)^-24)/.12)+1) 10 = 71370*8.78432 11 = $ 626937 12 13 Building C) 14 Present value = cash payment - annual rent* ((1-(1.12)^-25)/.12)) 15 = 657400 - (6800 * ((1-(1.12)^-25)/.12)) = 71370*8.78432 = $ 604067 18 19 20 Building A 21 Building B 22 Building Net Present Value 611,000 $ 626,937 604,067 23 24 The Tarmarisk Inc. should locate itself in Building C 25 As it has least present value acots M Sheet545 Sheet546 Sheet547 Sheet548 Ready K Sheet549 Sheet550 Sheet551 Sheet552