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Required information The owners of Annie's Homemade Ice Cream are deciding between buying land and building a 1 , 8 0 0 square - feet

Required information
The owners of Annie's Homemade Ice Cream are deciding between buying land and building a 1,800 square-feet ice
cream shop or signing a five-year lease for 1,500 square feet of retail space. If the company decides to buy land and build
an ice cream shop, the total cost of the land, building, and paved parking lot is $1,200,000. At the end of five years, the
company estimates the market value of this commercial property would be $1,300,000. If the company chooses to sign a
lease, it would cost $350,000 to transform the unfinished leased space into an ice cream shop.
For simplicity, Annie's is assuming the following items would be the same across the five-year time horizon under the buy-
and-build and lease alternatives:
Annual sales
Ingredients costs
Labor costs
Equipment costs
Working capital invested and released
All other operating costs besides those mentioned below
If the company chooses the lease option, it would pay annual rent of $36,000. If Annie's chooses to buy-and build, some
of its operating costs would be higher than the lease option. For example, under the buy-and-build option, Annie's would
pay higher property taxes, insurance premiums, and utility expenses. The annual amount by which these operating costs
exceed the lease option is $15,000.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using table.
Assuming a discount rate of 14% and using a five-year time horizon:
a. What is the net present value of the relevant cash flows associated with the lease option?
Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Negative amount should
be indicated with a minus sign.
Net present value of relevant cash flows
b. What is the net present value of the relevant cash flows associated with the buy-and-build option?
Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Negative amount should
be indicated with a minus sign.
Net present value of relevant cash flows
c. Which of the two options is the least-cost alternative?
Lease
Buy-and-build
d. Given the assumed discount rate of 14%, what would have to be the market value of the commercial property at the end of five
years to make Annie's indifferent when choosing between the lease and buy-and-build alternatives?
Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.
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