Question

The Pina 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, Pina has decided to locate a new factory in the Panama City area. Pina 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 $613,700, useful life 27 years.

Building B: Lease for 27 years with annual lease payments of $70,100 being made at the beginning of the year.

Building C: Purchase for $659,100 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,470. Rental payments will be received at the end of each year. The Pina Inc. has no aversion to being a landlord.

Click here to view factor tables

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

select a building Building ABuilding BBuilding C

Answer 1

Ans:

Present value of Building A = Cash price of Building = $613700

Present value of Building B = $70100 × Cumulative PV Factor at 12% for 27 periods for annuity due

= $70100 × 8.89566 = $623586

Present value of Building C = Cash Paid - Present value of rental income = $659100 -  $6470 × Cumulative PV Factor at 12% for 27 periods for annuity

= $659100 - $6470 × 7.94255

=$659100 - $48042.985

=$611057

The Pina Inc. should locate itself in Building C.

Note: Cummulative PV values are as per table