g$6150$gThe ABC Corporation Is considering opening an office in a new market area that would allow it to Increase its annual sales by $$2\mathrm{.}6$

million. The cost of goods sold is estimated to be $40$ percent of sales, and corporate overhead would Increase by $$305,500,$ not

Including the cost of elther acquiring or leasing office space. The corporation will have to Invest $$2\mathrm{.}6$ million In office furniture, office

equipment, and other up$-$front costs assoclated with opening the new office before considering the costs of owning or leasing the

office space.

A small office bullding could be purchased for sole use by the corporation at a total price of $$5\mathrm{.}6$ million, of which $$900,000$ of the

purchase price would represent land value, and $$4\mathrm{.}7$ million would represent bullding value. The cost of the bullding would be

depreclated over $39$ years. The corporation is in a $21$ percent tax bracket. An Investor Is willing to purchase the same bullding and

lease it to the corporation for $$615,000$ per year for a term of $15$ years, with the corporation paying all real estate operating expenses

$($absolute net lease$).$ Real estate operating expenses are estimated to be $50$ percent of the lease payments. Estimates are that the

property value will Increase over the $15-$year lease term for a sale price of $$6\mathrm{.}1$ million at the end of the $15$ years. If the property Is

purchased, It would be financed with an Interest$-$only mortgage for $$3,260,000$ at an Interest rate of $4\mathrm{.}5$ percent with a balloon

payment due after $15$ years.

Required:

a$.$ What is the return from opening the office bullding under the assumption that it is leased?

b$.$ What is the return from opening the office building under the assumption that It is owned?

c$.$ What is the return on the Incremental cash flow from owning versus leasing?