Please Help, Exercise 6-12
The Larkspur 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, Larkspur has decided to locate a new factory in the Panama City area. Larkspur 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 $612,100, useful life 26 years.
Building B: Lease for 26 years with annual lease payments of $71,490 being made at the beginning of the year.
Building C: Purchase for $655,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,850. Rental payments will be received at the end of each year. The Larkspur Inc. has no aversion to being a landlord.
In which building would you recommend that The Larkspur Inc. locate, assuming a 11% 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 ValueBuilding A
The Larkspur Inc. should locate itself in Building BBuilding CBuilding A