Question

The Windsor 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, Windsor has decided to locate a new factory in the Panama City area. Windsor 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 $610,600, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,980 being made at the beginning of the year.

Building C: Purchase for $653,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,050. Rental payments will be received at the end of each year. The Windsor Inc. has no aversion to being a landlord.

In which building would you recommend that The Windsor Inc. locate, assuming a 10% cost of funds?

Net Present Value

Building A

$enter a dollar amount rounded to 0 decimal places

Building B

$enter a dollar amount rounded to 0 decimal places

Building C

$enter a dollar amount rounded to 0 decimal places

Answer 1

Year	PV factor @ 10%	Remarks
1	0.90909	= 1 / 1.10
2	0.82645	= 0.90909 / 1.10
3	0.75131	= 0.82645 / 1.10
4	0.68301	= 0.75131 / 1.10
5	0.62092	= 0.68301 / 1.10
6	0.56447	= 0.62092 / 1.10
7	0.51316	= 0.56447 / 1.10
8	0.46651	= 0.51316 / 1.10
9	0.42410	= 0.46651 / 1.10
10	0.38554	= 0.4241 / 1.10
11	0.35049	= 0.38554 / 1.10
12	0.31863	= 0.35049 / 1.10
13	0.28966	= 0.31863 / 1.10
14	0.26333	= 0.28966 / 1.10
15	0.23939	= 0.26333 / 1.10
16	0.21763	= 0.23939 / 1.10
17	0.19784	= 0.21763 / 1.10
18	0.17986	= 0.19784 / 1.10
19	0.16351	= 0.17986 / 1.10
20	0.14864	= 0.16351 / 1.10
21	0.13513	= 0.14864 / 1.10
22	0.12285	= 0.13513 / 1.10
23	0.11168	= 0.12285 / 1.10
24	0.10153	= 0.11168 / 1.10
25	0.09230	= 0.10153 / 1.10
26	0.08391	= 0.0923 / 1.10
Total	9.16095

Please use your Present Value factor, otherwise minor difference may be arise.

Answer 1

Building A	Cash inflows (outflows)	PV factor @10%	Present value
Purchase price	(610,600)	1.00000	(610,600)
Net present value (cash outflows)			(610,600)

Answer 2

Building B	Cash inflows (outflows)	PV factor @10%	Present value
Lease payments	(71,980)	9.16095	(659,405)
Net present value (cash outflows)			(659,405)

Answer 3

Building C	Cash inflows (outflows)	PV factor @10%	Present value
Purchase price	(653,200)	1.00000	(653,200)
Rental receipts	6,050	9.16095	55,424
Net present value (cash outflows)			(597,776)