Question

The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is considering two options for the unused space. The Popcorn Store would like to purchase the half of the building that is not being used for $614,000. A 5% commission would have to be paid at the time of purchase. The Porter Beverage would like to lease the half of the building for the next 5 years at $162,100 each year. Porter would have to continue paying $33,600 of property taxes each year and $6,400 of yearly insurance on the property, according to the proposed lease agreement. Determine the differential income or loss from the lease alternative. Enter a loss as a negative number.

Answer 1

Answer:

The Porter Beverage FActory

Differential income from the lease alternative is:

= $27,200.

Explanation:

a) Data and Calculations:

                                          Alternative   Alternative

                                             1  Sale           2  Lease

Income:

Sales proceeds                  $614,000

Lease receipts                                         $810,500

5% commission                    (30,700)

Property taxes each year                        (168,000)

Annual insurance                                      (32,000)

Income (loss)                    $583,300     $610,500

Differential income = $27,200 ($610,500 - $583,300)

b) The above differential income does not take in account the time value of money.  In addition, it does not consider future streams of income that can be received when the building is either leased out to another entity or sold.