As a Unity Holdings Plc junior manager, you have been asked for your annotated calculations and recommendation regarding a decision whether to lease or buy new premises.

The option to buy

The costs of buying include 1,950,000 for the freehold land, building costs of 2,612,500, and 268,100 for fittings and equipment. At the end of the fifth year the property is expected to be worth 4m.

The option to lease

The building to be leased requires refurbishment that will cost 500,000 and fixtures and fittings will cost 283,000. The terms of the 5 year lease are 50,000 per month.

Comply with company policies

Any decision should be based on the results of calculating Net Present Value (NPV) of 5 years of cash flows using a cost of capital of 10%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a significant cushion in case of increases in inflation or interest rates that the directors are concerned are unpredictable.

The cash flows

Both options will use the same cash flows. Year 1 sales revenue is expected to be 7,150,000; the cost of core products are 2,370,000; ancillary stock purchases 1,250,860; staff costs 1,138,020; light & heat 368,720; other overheads 604,240. The cash flows for years 2 to 5 are the same, but are expected to increase by 2% inflation each year.

Requirements for Question 3

Using the information above and in accord with the above stated company policy you are required to calculate the following for both options:

1. Net Present Value (NPV)

Property lease option

Property purchase option