Question

Exercise 6-12

The Bonita 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, Bonita has decided to locate a new factory in the Panama City area. Bonita 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 $618,100, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $70,340 being made at the beginning of the year.

Building C: Purchase for $653,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,540. Rental payments will be received at the end of each year. The Bonita Inc. has no aversion to being a landlord.

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In which building would you recommend that The Bonita 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 Bonita Inc. should locate itself in

Answer 1

	Net Present Value
Building A	-618100	or 618100
Building B	-622026	or 622026
Building C	-601562	or 601562
The Bonita Inc. should locate itself in	Building C
Workings:
Building B:
Annual lease payments	70340
X PV factory of annuity due	8.84314	=1+(1-(1.12)^-25)/0.12
Preset value of Annual lease payments	622026
Building C:
Annual rental	6540
X PV factory of annuity due	7.89566	=(1-(1.12)^-26)/0.12
Present value of Annual rentals	51638
Present value of Cash payments	653200
Less: Present value of Annual rentals	51638
Net Present Value	601562