Question

he 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 $610,000, useful life 27 years. Building B: Lease for 27 years with annual lease payments of $71,570 being made at the beginning of the year. Building C: Purchase for $650,800 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,890. Rental payments will be received at the end of each year. The Nash Inc. has no aversion to being a landlord.'

Answer 1

Check the explanation

Step-by-step explanation:

Present value of Building A = Cash price of Building = $610,000

Present value of Building B = $70,000 * Cumulative PV Factor at 12% for 25 periods of annuity due

= $70,000 * 8.78432 = $614,902

Present value of Building C = Cash price- Present value of rental income = $650,000 - $6,000 * Cumulative PV Factor at 12% for 25 periods

= $650,000 - $6,000 * 7.84314 = $602,941

The flounder Inc. should locate itself in Building C.