The Stewart Cake Factory owns a building for its operations. Stewart uses only h

Question

The Stewart Cake Factory owns a building for its operations. Stewart uses only half of the building and is considering two options for the unused space. The Candy Store would like to purchase the half of the building that is not being used for $550,000. A 7% commission would have to be paid at the time of purchase. Ice Cream Delight would like to lease the half of the building for the next 5 years at $100,000 each year. Stewart would have to continue paying $9,000 of property taxes each year and $1,000 of yearly insurance on the property, according to the proposed lease agreement.

Required:

a. Calculate the cashflow generated by the sale of the other half of the building to The Candy Store.

b. Calculate the cashflow generated by the lease of the other half of the building to Ice Cream Delight. (ignore the time value of money issues)

c. Will you sell or lease the other half of the building? Justify your answer.

Explanation / Answer

a. The cashflow generated by the sale of the other half of the building to The Candy Store

= Purchase price

=$550000

b. The cashflow generated by the lease of the other half of the building to Ice Cream Delight

= (Lease amount to be paid each year- Property tax and insurance)* No. of years

= ($100000-$1000)*5

= $495000

c. The other half of the building should be sold as it is providing higher cash flows of $550000 now whereas Leasing would provide $99000 each year for the coming five years which now comes at $495000, $60000 less than the cash flow in selling and wer have not taken the time values yet, taking which will reduce the cash flows further.

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