Properties Ltd has the opportunity to acquire a lease on a block of flats that has only two years remaining before it expires. The cost of the lease would be 100,000. The flats are let almost exclusively to naval personnel. There is a large naval base located nearby, and there is little other demand for the flats. The occupancy rate of the flats will change in the remaining two years of the lease, depending on the outcome of the defense review. The navy is currently considering three options for the naval base. These are: Option 1. Increase the size of the base by closing down a base in another region and transferring the personnel to the one located near the flats. Option 2. Close down the naval base near to the flats and leave only a skeleton staff there for maintenance purposes. The personnel would be moved to a base in another region. Option 3. Leave the base open but reduce staffing levels by 20% Properties Ltd has estimated the following net cash flows for each of the two years: Option 1= 80,000, 50%; Option 2= with an unknown probability and 10,000 cash flow; Option 3= 50,000, 30%. Assume the cost of capital 10%. Should the business purchase the lease of flats? Why? Yes, it does. Positive expected present value. Yes, it does. Negative expected present value. No, it does not. Positive expected present value. No, it does not. Negative expected present value. Impossible to determine. Information is missing. Impossible to determine. IRR no determined. Properties Ltd has the opportunity to acquire a lease on a block of flats that has only two years remaining before it expires. The cost of the lease would be 100,000. The flats are let almost exclusively to naval personnel. There is a large naval base located nearby, and there is little other demand for the flats. The occupancy rate of the flats will change in the remaining two years of the lease, depending on the outcome of the defense review. The navy is currently considering three options for the naval base. These are: Option 1. Increase the size of the base by closing down a base in another region and transferring the personnel to the one located near the flats. Option 2. Close down the naval base near to the flats and leave only a skeleton staff there for maintenance purposes. The personnel would be moved to a base in another region. Option 3. Leave the base open but reduce staffing levels by 20% Properties Ltd has estimated the following net cash flows for each of the two years: Option 1= 80,000, 50%; Option 2= with an unknown probability and 10,000 cash flow; Option 3= 50,000, 30%. Assume the cost of capital 10%. Should the business purchase the lease of flats? Why? Yes, it does. Positive expected present value. Yes, it does. Negative expected present value. No, it does not. Positive expected present value. No, it does not. Negative expected present value. Impossible to determine. Information is missing. Impossible to determine. IRR no determined
