Star Studios is looking to purchase a new building for its upcoming film product

Question

Star Studios is looking to purchase a new building for its upcoming film productions. The company finds a suitabl location that has a list price of $1.400,000. The seller gives Star Studios the following purchase options: (Eas PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answers to 2 decimal places.) 1. Pay $1,400,000 immediately 2. Pay $400,000 immediately and then pay $130,000 each year over the next 10 years, with the first payment due in one year 3. Make 10 annual installments of $150,000, with the first payment due in one year 4. Make a single payment of $2,100,000 at the end of five years. Required: 1-a. Determine the present value for each option assuming that the company can borrow funds to finance the purchase at 696. Present Value Option 1 Option 2 Option 3 Option 4 1-b. Which option is the lowest-cost alternative for Star Studios? Option 2 O Option1 O Option 4 O Option 3

Explanation / Answer

Answer 1-a Calculation of present values Option 1 Option 2 Option 3 Option 4 Year Cash Outflow Discount Factor @ 6% Present Value Year Cash Outflow Discount Factor @ 6% Present Value Year Cash Outflow Discount Factor @ 6% Present Value Year Cash Outflow Discount Factor @ 6% Present Value A   B C B*C A   B C B*C A   B C B*C A   B C B*C 0 $1,400,000 1 $1,400,000 0 $400,000 1 $400,000 0 $0 1 $0 0 $0 1 $0 1 $0 0.943396 $0 1 $130,000 0.943396 $122,642 1 $150,000 0.943396 $141,509 1 $0 0.943396 $0 2 $0 0.889996 $0 2 $130,000 0.889996 $115,700 2 $150,000 0.889996 $133,499 2 $0 0.889996 $0 3 $0 0.839619 $0 3 $130,000 0.839619 $109,151 3 $150,000 0.839619 $125,943 3 $0 0.839619 $0 4 $0 0.792094 $0 4 $130,000 0.792094 $102,972 4 $150,000 0.792094 $118,814 4 $0 0.792094 $0 5 $0 0.747258 $0 5 $130,000 0.747258 $97,144 5 $150,000 0.747258 $112,089 5 $2,100,000 0.747258 $1,569,242 6 $0 0.704961 $0 6 $130,000 0.704961 $91,645 6 $150,000 0.704961 $105,744 6 $0 0.704961 $0 7 $0 0.665057 $0 7 $130,000 0.665057 $86,457 7 $150,000 0.665057 $99,759 7 $0 0.665057 $0 8 $0 0.627412 $0 8 $130,000 0.627412 $81,564 8 $150,000 0.627412 $94,112 8 $0 0.627412 $0 9 $0 0.591898 $0 9 $130,000 0.591898 $76,947 9 $150,000 0.591898 $88,785 9 $0 0.591898 $0 10 $0 0.558395 $0 10 $130,000 0.558395 $72,591 10 $150,000 0.558395 $83,759 10 $0 0.558395 $0 Present Values $1,400,000 Present Values $1,356,811 Present Values $1,104,013 Present Values $1,569,242 Present Values Option 1 $1,400,000 Option 2 $1,356,811 Option 3 $1,104,013 Option 4 $1,569,242 Answer 1-b Option 3 is the lowest cost alternative for Star Studios.

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