Answer:
The Porter Beverage Factory
Two Options for unused Building: Income
Option a) Net Income:
Building purchase = $550,000
less 5% commission = $27,500
Net Income = $522,500
Option b) Net Income:
Lease Income = $500,000 ($100,000 x 5)
Less Property Taxes = $15,000
Less Insurance = $2,000
Net Income = $483,000
Differential Income or Loss from the Lease Alternative:
Net Lease Income = $483,000
less purchase income = $522,500
Differential Loss = $39,500
Explanation:
The outright sale would yield income after sales commission of $522,500 in the first year.
The lease agreement would yield income after expenses of $483,000. The Present value would even be less, when calculated for the five years of lease payment.
Considering these two options, the outright sale looks more beneficial in dollar terms in the short-run. However, it is important to note that the lease agreement is only for 5 years unlike the outright sale, which lasts forever. Afterall, after the end of the lease term, the building space could still be sold.
