Exercise 6-12

The Sarasota 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, Sarasota has decided to locate a new factory in the Panama City area. Sarasota 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 $611,800, useful life26years.

Building B:Lease for26years with annual lease payments of $70,900being made at the beginning of the year.

Building C:Purchase for $655,200cash. This building is larger than needed; however, the excess space can be sublet for26years at a net annual rental of $6,230. Rental payments will be received at the end of each year. The Sarasota Inc. has no aversion to being a landlord.

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In which building would you recommend that The Sarasota 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 Sarasota Inc. should locate itself in which building?