The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $$2\mathrm{.}6$

million. The cost of goods sold is estimated to be $40$ percent of sales, and corporate overhead would increase by $$306,000,$ not

including the cost of either acquiring or leasing office space. The corporation will have to invest $$2\mathrm{.}6$ million in office furniture, office

equipment, and other up$-$front costs associated with opening the 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 $$5\mathrm{.}7$ million, of which $$900,000$ of the

purchase price would represent land value, and $$4\mathrm{.}8$ million would represent building value. The cost of the building would be

depreciated over $39$ years. The corporation is in a $21$ percent tax bracket. An investor is willing to purchase the same building and

lease it to the corporation for $$630,000$ per year for a term of $15$ years, with the corporation paying all real estate operating expenses

$($absolute net lease$).$ Real estate operating expenses are estimated to be $50$ percent of the lease payments. Estimates are that the

property value will increase over the $15-$year lease term for a sale price of $$6\mathrm{.}2$ million at the end of the $15$ years. If the property is

purchased, it would be financed with an interest$-$only mortgage for $$3,270,000$ at an interest rate of $4\mathrm{.}5$ percent with a balloon

payment due after $15$ years.

Required:

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?