Exercise 6-12 The Bramble Inc., a manufacturer of low-sugar, low-sodium, low-cho
ID: 2411747 • Letter: E
Question
Exercise 6-12
The Bramble 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, Bramble has decided to locate a new factory in the Panama City area. Bramble 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 27 years.
Building B: Lease for 27 years with annual lease payments of $70,870 being made at the beginning of the year.
Building C: Purchase for $657,200 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,110. Rental payments will be received at the end of each year. The Bramble Inc. has no aversion to being a landlord.
Click here to view factor tables
In which building would you recommend that The Bramble Inc. locate, assuming a 12% cost of funds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Net Present Value
Building A
$
Building B
$
Building C
$
The Bramble Inc. should locate itself in
Net Present Value
Building A
$
Building B
$
Building C
$
Explanation / Answer
Net present value (NPV) Building A: Cashflow at 0th year=-610600 Hence,NPV=-610600 Building B: Year Cashflow PV @12% PV 0 -70870 1 -70870 1 to 26 -70870 7.896 -559590 Net present value -630460 Building C: Year Cashflow PV @12% PV 0 -657200 1 -657200 1 to 27 6110 7.943 48532 Net present value -608668 Building B is preferable since NPV of cashoutflow is least in the case of Buliding C.