McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made an offer of $2,300,000.00 in cash and $300,000 each year for 15 years for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00 in cash.

Now, the land owner, James Francis, must make a decision between the two competing offers. To make this decision, James should first identify the Present Value (FV) of each offer. James's bank is offering a 12 percent (12%) interest rate if the competing manufacturing company borrows money to pay its annual payment. Let's help James make his decision by answering the following questions using the template to the right.

1. What is the Present Value (PV) of each offer?

2. Based on your Present Value calculations, which offer should James accept?

McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow seventy percent (70%) Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to purchase the land. This means McCormick & Company will need to make a thirty percent (30%) down payment to secure the commercial acquisition and development loan. McCormick & Company is considering three different loan options:

Loan A: 20-year loan with a fixed annual interest rate of 6 percent

Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent

Loan C: 15-year loan with a fixed annual interest rate of 5 percent

3. How much of the total $4,424,000.00 offer will be financed?

4. Which loan will have the lowest monthly payment?

5. Which loan will have the lowest total payback amount?

6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why?

J L o P. Q R s T U V w 2 3 B C D E H K M N McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made an offer of $2,300,000.00 in cash and $300,000 each year for 15 years for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00 in cash. 4 5 6 7 8 9 Now, the land owner, James Francis, must make a decision between the two competing offers. To make this decision, James should first identify the Present Value (FV) of each offer. James's bank is offering a 12 percent (12%) interest rate if the competing manufacturing company borrows money to pay its annual payment. Let's help James make his decision by answering the following questions using the template to the right. 10 11 12 1 N I/Y PV PMT FV 1. What is the Present Value (PV) of each offer? 13 2. Based on your Present Value calculations, which offer should James accept? 14 15 2 16 McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow seventy percent (70%) Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to purchase the land. This means McCormick & Company will need to make a thirty percent (30%) down payment to secure the commercial acquisition a development loan. McCormick & Company is considering different loan options: 17 18 3 Price Percent Down Amount Financed 19 Loan A: 20-year loan with a fixed annual interest rate of 6 percent Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent Loan C: 15-year loan with a fixed annual interest rate of 5 percent 4 N I/Y PV PMT 20 21 22 23 24 25 Loan Loan A Loan B Loan C 3. How much of the total $4,424,000.00 offer will be financed? 4. Which loan will have the lowest monthly payment? 5 N I/Y PV PMT Total Paid 26 27 28 5. Which loan will have the lowest total payback amount? Loan Loan A Loan B Loan C 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? 29 30 31 32 6 Open-ended discussion