Question

The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is considering two options for the unused space. The Popcorn Store would like to purchase the half of the building that is not being used for $397,000. A 5% commission would have to be paid at the time of purchase. Salty Snacks would like to lease the half of the building for the next 5 years at $104,800 each year. Stewart would have to continue paying $21,800 of property taxes each year and $4,200 of yearly insurance on the property, according to the proposed lease agreement.

Determine the differential income or loss from the lease alternative.

Answer 1

Ans-Determining the differential income or loss from the alternative:-

Option 1- If popcorn store is sold:-

Cash flow from sale of building-$397,000

Commision to be paid-5% of sale price=$397,000*5%=$19,850

Net Cash flows if the building is sold-$397,000-$19,850=$377,150

Option -2- If popcorn store is leased for 5 years:-

Lease rent each year-$104,800

Property taxes to be paid each year-$21,800

Property insurance to be paid each year-$4,200

Net cash flows per year from laesing-$104,800-$21,800-$4,200=$78,800

Net cash flows for 5 years from leasing=$78,800*5years =$394,000

Differntial income from leasing alternative=cashflow from leasing -cashflow from sale

=$394,000-$377,150

= $16,850

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