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Gavin Mills has an existing facility that it paid 30,000,000 for 10 years ago. It has 3 choices for this facility now: sell it outright
Gavin Mills has an existing facility that it paid 30,000,000 for 10 years ago. It has 3 choices for this facility now: sell it outright for 9.5M today, lease it for the next 4 years to a supplier, then sell it at the end of the last year of the lease for 5M, or use it to produce flax seed for 4 years, then sell it at the end of the last year of production for 6M, but it will have to be upgraded (today) for use at a cost of 1.5M (not paid under the lease option). If it is used by Gavin to produce flax seed it can be sold for $42 a bushel with a contribution margin ratio (how much the firm keeps after variable costs of production) of 25%. To operate the plant, Gavin will incur $200,000 per year of fixed costs, regardless of production levels (not applicable to the lease). Gavin forecasts that it will sell the following bushels in each of the next 4 years: 200,000, 300,000, 400,000, 100,000. The lease terms would be $2M per year plus a $200,000 per year reduction in costs for the supplies Gavin buys from the leasee. Please
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