Assume LIUAir, our Sneaker company, is evaluating adding a new warehouse. The added space is estimated to increase our operation and get us an extra $75,000 profit per year (added revenue minus all costs except the new warehouse involved), for the next 10 years.

We can either BUY the warehouse for a cool million dollars, or RENT it at a fixed $50,000 per year. Rent will be fixed at that rate for the whole 10 years. If we bought it, we estimate the warehouse will be worth about $900,000 at the end of the 10 years.

Assume our cost of capital to be 6%:

1) Would you go ahead with the expansion?

2) If you went ahead, would you rent or buy the building?

1,000,000 x 10 x 6%= 600,000

Now assume our cost of capital to be 4%:

3) Would you go ahead with the expansion?

4) If you went ahead, would you rent or buy the building?