Question

The Crane 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, Crane has decided to locate a new factory in the Panama City area. Crane 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 $617,800, useful life 26 years.
Building B: Lease for 26 years with annual lease payments of $71,870 being made at the beginning of the year.
Building C: Purchase for $650,400 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,980. Rental payments will be received at the end of each year. The Crane Inc. has no aversion to being a landlord.

Required:
In which building would you recommend that The Nash Inc. locate, assuming a 12% cost of funds?

Answer 1

Answer:

building b

Explanation:

Nash would buy the cheapest building

The present value of building 2 and 3 has to be determined

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Building b

cash flow each year from year 1 to 26 = $-71,870

I = 12%

PV = . 567461.08

Building c

Cash flow in year 0 =  $-650,400

cash flow each year from year 1 to 26 = $6,980

I = 12%

Pv = 595288.29

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

building b is the cheapest