Exercise 6-12

The Flounder 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, Flounder has decided to locate a new factory in the Panama City area. Flounder 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 $618,900, useful life27years.

Building B:Lease for27years with annual lease payments of $71,820being made at the beginning of the year.

Building C:Purchase for $652,700cash. This building is larger than needed; however, the excess space can be sublet for27years at a net annual rental of $6,430. Rental payments will be received at the end of each year. The Flounder Inc. has no aversion to being a landlord.

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In which building would you recommend that The Flounder Inc. locate, assuming a12% 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 Flounder Inc. should locate itself in

Building B

Building C

Building A