Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

g 6 1 5 0 gThe ABC Corporation Is considering opening an office in a new market area that would allow it to Increase its

g6150gThe ABC Corporation Is considering opening an office in a new market area that would allow it to Increase its annual sales by $2.6
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 $2.6 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 $5.6 million, of which $900,000 of the
purchase price would represent land value, and $4.7 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 $6.1 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 4.5 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?
All the answers have to be in a percent form
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Finance

Authors: Keith Pilbeam

2nd Edition

0333730976, 978-0333730973

More Books

Students also viewed these Finance questions

Question

Discuss how selfesteem is developed.

Answered: 1 week ago