Introduction:

You eagerly open a letter from the Saunders Bank. Its from Michael, the loan officer you met with last week. Eagerly, you read the letter: Dear Karen, after reviewing the financial statements you submitted, I am delighted to inform you that the Saunders Bank has approved your loan request. The terms of the loan are as follows: Principal borrowed = $100,000 Term = 5 years Interest = 8% Monthly payments begin on the first of the next month. By the end of the week, $100,000 will be deposited into the Karen Inc. account. Please allow me to offer my congratulations. The Saunders Bank looks forward to a long and profitable relationship with Karen Inc. Feel free to reach out to me if you need additional funding and or help with any financial analysis. Sincerely, Michael Andrews. After receiving Michaels letter, you immediately calculate the amount of each monthly loan payment. You are excited to begin plans to expand into international markets. Knowing that you will be making a lot of financial decisions, you decide to prepare financial statement ratios for the company. The ratios will be immensely helpful as you begin to start to consider various capital investments. Once you have prepared the financial ratios, your next step is to select a location for a warehouse to hold the inventory. Your attorneys recommend hiring a commercial real estate agent to locate a few warehouse options. They suggest considering the eastern portion of Europe in case you decide to expand into Asia sooner than originally planned. Luckily, your Aunt Mary who lives in San Antonio, Texas recently married a commercial real estate broker; his name is Barret. You write to Barret requesting information about potential warehouse properties for sale in the San Antonio area. Quick to respond, Barret writes back with information on two properties recently listed on the San Antonio MLS; both are for sale. Barret, who refers to himself as B3-the Best Broker in San Antonio, thinks you could purchase either property for $1,250,000. Both properties are significantly larger than you currently need, but the extra square footage could be rented out for at least five years. The main difference in these two properties is that one building is zoned for fixed rental rates, reminiscence of its historical communist economic system and the other property is in a free-market rental zone, thus you could raise the rent as time passes. Barret provides his estimates of rental income you could earn over the next five years.

To make the most cost-efficient decision, you decide to compute the net present value and internal rate of return for each of the two warehouses assuming a risk-free rate of 3%. It has been awhile since you performed capital investment analysis. Luckily, you recalled that Michael agreed to help you with any financial analysis needed moving forward. You decide to review the resources Michael shared, compute the NPV and IRR for both warehouses. Before making your final decision on which warehouse to purchase, you are thinking it may be best to check in with Michael to ensure your calculations are correct and that you have chosen the better investment.

Directions: Compute the net present value and the internal rate of both warehouses. Based on the results of the net present value and internal rate of return, which of the two warehouses should be bought? Explain why in 3 to 5 sentences.

Potential Rental Estimates for Next 5 Years Warehouse Year (Free Market zone) Warehouse (Fixed rate zone) Projected 0 $ (1,250,000) $ (1,250,000) Initial outlay 1 $ $ 250,000 $350,000 Annual rental income 2. 2 $ 350,000 $350,000 Annual rental income 3 $ 450,000 $350,000 Annual rental income 4 $ 500,000 $350,000 Annual rental income 5 $ 750,000 $350,000 Annual rental income