Exercise 6-12

The Vaughn 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, Vaughn has decided to locate a new factory in the Panama City area. Vaughn 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 $616,000, useful life25years.

Building B:Lease for25years with annual lease payments of $70,700being made at the beginning of the year.

Building C:Purchase for $654,700cash. This building is larger than needed; however, the excess space can be sublet for25years at a net annual rental of $6,820. Rental payments will be received at the end of each year. The Vaughn Inc. has no aversion to being a landlord.

In which building would you recommend that The Vaughn Inc. locate, assuming a12% cost of funds?