The Teal Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinne
ID: 2538088 • Letter: T
Question
The Teal 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, Teal has decided to locate a new factory in the Panama City area. Teal 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 $613,700, useful life 27 years. Building B: Lease for 27 years with annual lease payments of $70,100 being made at the beginning of the year Building C: Purchase for $659,100 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,470. Rental payments will be received at the end of each year. The Teal Inc, has no aversion to being a landlord. In which building would you recommend that The Teal 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 BuildingB Building C The Teal Inc. should locate itself inExplanation / Answer
Answer
Building A
Net Present Value = Initial Cash Outflow = Purchase price of Building
Net Present Value = ($613,700)
Building B
Annual Lease Payment = $70,100
PVAF @12% for 27 Years = 7.94255
Net Present Value = Annual Lease Payment * PVAF @12% for 27 Years
= $70,100 * 7.94255
Net Present Value = ($556,772.76)
Building C
Initial Cash Ouflow = $659,100
It is mentioned that we will receive $6,470 per year for 27 years as rent.
Present Value for future Cash inflow = Annual Rent * PVAF @12% for 27 Years
= $6,470 * 7.94255
Present Value for future Cash inflow = $51,388.3
Net Present Value = Present Value for future Cash inflow - Initial Cash Outflow
= 51,388.3 - 659,100
Net Present Value = ($607,711.7)
Conclusion
It is recommended to choose Building B as effective cost is least in this case
OR
NPV is highest in this case (The figures are negative so the highest will be least negative)