Question

The Sandhill 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, Sandhill has decided to locate a new factory in the Panama City area. Sandhill 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 $612,100, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,490 being made at the beginning of the year.

Building C: Purchase for $655,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,850. Rental payments will be received at the end of each year. The Sandhill Inc. has no aversion to being a landlord.

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In which building would you recommend that The Sandhill Inc. locate, assuming a 11% 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		$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

The Sandhill Inc. should locate itself in

select a building

The Sandhill 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, Sandhill has decided to locate a new factory in the Panama City area. Sandhill 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 $612,100, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,490 being made at the beginning of the year.

Building C: Purchase for $655,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,850. Rental payments will be received at the end of each year. The Sandhill Inc. has no aversion to being a landlord.

Click here to view factor tables

In which building would you recommend that The Sandhill Inc. locate, assuming a 11% 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		$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

The Sandhill Inc. should locate itself in

select a building

Answer 1

	Net Present Value
Building A	612100
Building B	673560
Building C	597057
The Sandhill Inc. should locate itself in	Building C

Workings:
Building B:
Annual payments	71490
X PV factor	9.42174	=1+(1-(1.11)^-25)/0.11
Net Present Value	673560
Building C:
Annual rentals	6850
X PV factor	8.48806	=(1-(1.11)^-26)/0.11
Present Value of rentals	58143
Net Present Value	597057	=655200-58143