The Porter Beverage Factory owns a building for its operations. Porter uses only

Question

The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is considering two options for the unused space. The Popcorn Store would like to purchase the half of the building that is not being used for $550,000. A 5% commission would have to be paid at the time of purchase. Salty Snacks would like to lease the half of the building for the next 5 years at $100,000 each year. Porter would have to continue paying $15,000 of property taxes each year and $2,000 of yearly insurance on the property, according to the proposed lease agreement. REQUIRED: (SHOW YOUR WORK) Determine the differential income or loss from the lease alternative.

Explanation / Answer

Option 1: Sale of building

Current sale price of building = 550000

Commission amount = 550000*5% = 27500

Net sale price of building = 550000 - 27500 = 522500

Option 2: Lease

Net lease rent received per year = 100000

Total lease rent received = 100000"5 = 500000

Loss from the lease alternative = 522500 - 500000 = 22500

Note: Opportunity cost of capital has been into calculation because interest rate is not given in question.

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