Question

The Wildhorse 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, Wildhorse has decided to locate a new factory in the Panama City area. Wildhorse 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 $610,600, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,980 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 $6,050. Rental payments will be received at the end of each year. The Wildhorse Inc. has no aversion to being a landlord.

In which building would you recommend that The Wildhorse Inc. locate, assuming a 10% 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		$

Answer 1

	Net present value
Building A	610600
Building B	725345
Building C	597776
Wildhorse Inc. locate itself in Building C
Workings:
Building B
Annual payments	71980
X PV factor of annuity due	10.07704	=1+(1-(1.10)^-25)/0.10
Net present value	725345
Building C
Annual rental	6050
X PV factor of annuity	9.16095	=(1-(1.10)^-26)/0.10
Present value of Annual rental	55424
Purchase cost	653200
Less: Present value of Annual rental	55424
Net present value	597776