Advanced: Relevant cash flows and calculation of NPV A company occupies the following premises for its manufacturing, warehousing and office administration:

Premises P consisting of 20 000 square feet, held on a long lease at a rental of £8500 per annum.

Premises a consisting of 8000 square feet, held on a lease with only three years to run. Rent is £11 000 per annum.

Premises A comprising temporary warehousing accommodation at

£2500 per annum.

Premises S are occupied by LM department of the company. This produces a product whose manufacture needs to be kept separate from the company's main production but whose warehousing does not. LM department needs a further 4000 square feet of warehousing space.

The company's warehousing IS widely and inefficiently dispersed;

the management accountant has calculated that this results in lost sales whose contribution would be £12000 per annum.

The company has found possible accommodation in buildings T or V. If it used either of these, the company could:

(a) eliminate warehousing difficulties,

(b) sublet all premises a at £13 000 per annum,

(c) dispense with premises A, and

(d) provide total warehousing needs of LM department thus increasing manufacturing space to generate extra sales that would yield an extra net profit of £7500 per annum.

Additional costs and benefits would be as follows:

Building T:

Either

(i) 25 000 square feet would cost £1.80 per square foot. This would release 8000 square feet of premises P for subletting at £2 per square foot. Total removal costs would be £12000; or

(ii) 30 000 square feet would cost £1.75 per square foot. This would release 12000 square feet of premises P for subletting at

£1.75 per square foot. Total removal costs would be

£17000.

Bui1ding V.·

35000 square feet would cost £2.40 per square foot. This would enable the release of the entire premises P and its sale for a net figure of £115 000 after all expenses of sale and removal had been met.

The company's cost of capital is 12% per annum. It uses a life of 15 years for transactions of the type being considered.

You are required to calculate the comparative costs of the various configurations of premises open to the company and advise which is the most economic.

Ignore taxation and inflation, and assume that rents are payable annually in advance.

(NB All rents given above are inclusive of rates.)