Question

The Indigo 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, Indigo has decided to locate a new factory in the Panama City area. Indigo 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 $618,900, useful life 27 years.

Building B: Lease for 27 years with annual lease payments of $71,820 being made at the beginning of the year.

Building C: Purchase for $652,700 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,430. Rental payments will be received at the end of each year. The Indigo Inc. has no aversion to being a landlord.

In which building would you recommend that The Indigo 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 Indigo Inc. should locate itself in building A, B, or C ________

Answer 1

Solution:

Computation of Net Present Value of cash outflows - Indigo Inc.
Particulars	Period	PV factor	Amount	Present Value
Building A:
Cash purchase price	0	1	-$618,900.00	-$618,900
Net Present Value (A)				-$618,900
Building B:
Annual lease payments	0-26	8.89566	-$71,820.00	-$638,886
Net Present Value (B)				-$638,886
Building C:
Cash purchase price	0	1	-$652,700.00	-$652,700
Reovery from rent of excess space	1-27	7.94255	$6,430.00	$51,071
Net Present Value (C)				-$601,629

As net present value of Building C is highest, therefore Indigo Inc. should locate itself in Building C.