Should Carson Equity own or rent their new headquarters for the next 10 years?

Carson Equity is a multinational firm that provides consulting services to clients around the world. The company has a 12% expected return on its invested capital. Recently the firm has enjoyed an expansion in their clientele and is increasing their employee count. With growth in size, management feels that the firm needs to move into newer and bigger offices and is exploring options. Jackie Moore, VP of Development, was recently approached by a local realtor, who presented him with prime office space for rent in downtown Wichita Falls, available for immediate occupancy. The space he proposes is a single-user Class A office building with all of the high-end amenities demanded by management. Jackie felt that the space is suitable and decided to make the case at senior managements next meeting.

Surprisingly, a few days after receiving the rental proposal, Jackie was approached again regarding the same space, this time with an offer to purchase the space for $100 million. Intrigued by the idea, Jackie decided to present management with both options at managements next meeting.

Should Jackie recommend the own or rent option? Present your work in Excel.

The details for the rent option are as follows: + Assumptions: Property Value $100,000,000 Year 1 Rent for LL to achieve $8MM in NOI $9,800,000 Rent Growth Rate 2.465% Avg. Depri Life: 10 years Depreciable Value: $100,000,000 Annual Dept $10,000,000 Company Retained Capital by not buying Property Equity Investment in Operations Capital Borrowed for Investment in Operations Annual Interest Rate on Borrowed Capital Annual Interest Payment Annual Yield on Investment in Operations Income Tax Rate Company Discount Rate $100,000,000 $40,000,000 $60,000,000 6.00% $3,600,000 12.00% 21.00% 10.00% % Non-Land 80.00% Avg. Depri Life: Annual Depti: Derr. Value: $80,000,000 20 years $4,000,000 #The details for the own option are as follows: Assumptions: Property Value $100,000,000 Equity Investment in Building Capital Borrowed for Buying Building $40,000,000 $60,000,000 Annual Interest Rate on Borrowed Capital Annual Interest Payment 6.00% Annual Building Operating Expense $3,600,000 Property Year 10 Sale Revenue $2,000,000 Selling Costs $130,000,000 2.308% Selling Costs Repayment of Capital Borrowed for Buying Building $3,000,000 Income Tax Rate / Depreciation Tax Shield Rate $60,000,000 21.00% Accumulated Depreciation Tax Rate 25.00% Capital Gains Tax Rate 15.00%