**Part B** Please show all work!

3. The Hub City Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.5 million. Cost of goods sold is estimated to be 40% of sales, and corporate overhead would increase by $300,000, not including the cost of either acquiring or leasing the space. The corporation will have to invest $2.5 million in office furniture, office equipment, and other up-front costs associated with opening a new office before considering the costs of owning or leasing the office space. A small office building could be purchased for sole use by the corporation at a total price of $3.9 million, of which $600,000 of the purchase price would represent land value, and $3.3 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 30% tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $450,000 per year for a term of 15 years, with the corporation paying all of the real estate operating expenses (estimated to be 50% of the lease payments). Estimates are that property value will increase over the 15-year lease term for a sale price of $4.9 million at the end of the 15 years. If the property were purchased, it would be financed with an interest-only mortgage for $2,730,000 at an interest rate of 10% with a balloon payment due at the end of 15 years. a. What is the return from opening the office building 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