Question

The XYZ Company has a choice between two warehouses. A lease at location A costs $1000 per month with a payment of $2000 up front to guarantee the 3 year lease. Location B would cost $1200 per month and would be leased from month to month. The anticipated revenue in either location is $1500 per month. The estimated rate of return is 10% per year. Using net present value, determine which location would be the better choice.

Answer 1

Using net present value (NPV), the XYZ Company should choose between the two warehouses by calculating and comparing the NPVs for location A, including the upfront fee and monthly payments, and location B, with just the monthly lease costs, both against the steady monthly revenue.

Step-by-step explanation:

To determine which warehouse is the better choice for the XYZ Company, we must calculate the net present value (NPV) for each option over the 3-year period, considering the estimated 10% annual rate of return. The present value of an amount 'P' to be received in the future, 'n' years from now, at an interest rate 'r' is given by the formula PV = P / (1 + r)^n.

For location A, the total lease cost is the $2000 upfront fee plus $1000 per month for 36 months. The NPV for location A is the sum of the present values of these costs. The revenues from the warehouse ($1500 per month) must also be considered in the calculation for the net result.

For location B, the monthly lease cost is $1200, without any upfront fee. As this is a monthly arrangement, we must calculate the present value of each monthly lease payment separately and sum them for the total NPV. Again, the monthly revenue must be considered in the net NPV calculation.

After calculating the NPVs for both locations A and B, taking into account the respective costs and the consistent monthly revenue, the location with the higher NPV will be the more cost-effective choice for the XYZ Company.

Answer 2

A is better choice because present value of the cost is lower

Step-by-step explanation:

given data

lease A costs = $1000 per month

payment = $2000

lease B cost = $1200 per month

revenue either = $1500 per month

rate of return = 10% per year = \frac{0.10}{12} = 0.00833

solution

we find here first Cost of first lease that is express as

Cost of first lease = 2000 +
`(1000)/(1+0.00833)` +
`(1000)/((1+0.00833)^2)` +
`(1000)/((1+0.00833)^3)` .............
`(1000)/((1+0.00833)^(36))`

solve it we get

Cost of first lease = $32,991.24

and

as that Cost of second lease is here

Cost of second lease =
`(1200)/(1+0.00833)` +
`(1200)/((1+0.00833)^2)` +
`(1200)/((1+0.00833)^3)` .............
`(1200)/((1+0.00833)^(36))`

solve we get

Cost of second lease = $37,189.48

so we can see that at A is better choice because present value of the cost is lower