Exercise 6-12
The Kingbird 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, Kingbird has decided to locate a new factory in the Panama City area. Kingbird 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 $610,000, useful life 27 years.
Building B: Lease for 27 years with annual lease payments of $71,570 being made at the beginning of the year.
Building C: Purchase for $650,800 cash. This building is larger than needed; however, the excess space can be sublet for 27 years at a net annual rental of $6,890. Rental payments will be received at the end of each year.
The Kingbird Inc. has no aversion to being a landlord. Click here to view factor tables. In which building would you recommend that The Kingbird 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 Value
Building A $
Building B $
Building C $
The Kingbird Inc. should locate itself in Building…?
Expert Answer