Question

The Nash 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, Nash has decided to locate a new factory in the Panama City area. Nash 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 $611,000, useful life 25 years.
Building B: Lease for 25 years with annual lease payments of $71,370 being made at the beginning of the year.
Building C: Purchase for $657,400 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,800. Rental payments will be received at the end of each year. The Nash Inc. has no aversion to being a landlord.
In which building would you recommend that The Nash Inc. locate, assuming a 12% cost of funds?

Answer 1

BUILDING C

Step-by-step explanation:

Calculation to determine In which building would you recommend that The Nash Inc. locate, assuming a 12% cost of funds

BUILDING A $611,000

Calculation for BUILDING B

Annual payments $71,370

X PV factor 8.65246=1+(1-(1.11)^-24)/0.12

Net present value $617,526.1

Calculation for BUILDING C

Annual rental $6,800

X PV factor 7.71993 =(1-(1.11)^-25)/0.12

Present value 52,495.5

Net present value =$657,400- $52,495.5

Net present value =$604,905

Net present value

Building A $611,000

Building B $617,526.1

Building C $604,905

Based on the above calculation Nash inc should locate itself in Building C because it has less Net present value

Therefore the building you would recommend that The Nash Inc. locate, assuming a 12% cost of funds is BUILDING C