crane wa ?? her buy or lease a site depend up which is more advantag s The site

Question

crane wa ?? her buy or lease a site depend up which is more advantag s The site location cor ittee has naro ed do n the available sites toth, following three very si la balding that will meet he Building B: Lease for 27 years with annual lease payments of $71,820 being made at the beginning of the year Duilding C: Purchase for $652,700 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,430. Rental payments will be recelved at the end of each year. The Crane Inc, has no aversion to being a landlord would you fecommerd that The Crane l c. locate, assuming a 12% cost of funds? (hund factor volues to 5 decimal places eg. 1.25 124 and final answer to 0 decinal place, e.g. 45,581.) Building A Building B The Crane Inc. should locate itself in

Explanation / Answer

1. NPV of Building A = 618900

2. NPV of Building B = 638886 (Refer Table 1)

3.NPV of Building C = Purchase price* - PV of Net Inflow (*Refer Table 2)

= 652700 - 51070

= 606130

Option 3 is Better because of lower PV

Table 1

Year Annual Payment PV Factor @ 12% Amount 1 71820 1 71820 2 71820 0.892857143 64125 3 71820 0.797193878 57254.46429 4 71820 0.711780248 51120.0574 5 71820 0.635518078 45642.90839 6 71820 0.567426856 40752.59678 7 71820 0.506631121 36386.24712 8 71820 0.452349215 32487.72065 9 71820 0.403883228 29006.89343 10 71820 0.360610025 25899.01199 11 71820 0.321973237 23124.11785 12 71820 0.287476104 20646.5338 13 71820 0.256675093 18434.40518 14 71820 0.22917419 16459.29034 15 71820 0.204619813 14695.79494 16 71820 0.182696261 13121.24548 17 71820 0.163121662 11715.39775 18 71820 0.145644341 10460.17657 19 71820 0.13003959 9339.443362 20 71820 0.116106777 8338.788716 21 71820 0.103666765 7445.347068 22 71820 0.092559612 6647.631311 23 71820 0.08264251 5935.385099 24 71820 0.073787956 5299.450981 25 71820 0.065882103 4731.652662 26 71820 0.058823307 4224.689877 27 71820 0.052520809 3772.044533 638886.2956 Table2 Year Annual Inflow PV Factor @ 12% Amount 1 6430 0.892857143 5741.071429 2 6430 0.797193878 5125.956633 3 6430 0.711780248 4576.746993 4 6430 0.635518078 4086.381244 5 6430 0.567426856 3648.554682 6 6430 0.506631121 3257.638109 7 6430 0.452349215 2908.605455 8 6430 0.403883228 2596.969156 9 6430 0.360610025 2318.722461 10 6430 0.321973237 2070.287911 11 6430 0.287476104 1848.471349 12 6430 0.256675093 1650.420848 13 6430 0.22917419 1473.590043 14 6430 0.204619813 1315.705395 15 6430 0.182696261 1174.73696 16 6430 0.163121662 1048.872286 17 6430 0.145644341 936.4931122 18 6430 0.13003959 836.1545645 19 6430 0.116106777 746.5665754 20 6430 0.103666765 666.5772995 21 6430 0.092559612 595.1583031 22 6430 0.08264251 531.3913421 23 6430 0.073787956 474.4565554 24 6430 0.065882103 423.6219245 25 6430 0.058823307 378.2338611 26 6430 0.052520809 337.7088046 27 6430 0.04689358 301.5257184 51070.61901

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