Question
The Canadian Tire Company operates retail stores throughout Ontario. The company maintains a central warehouse of merchandise to stock the various stores. Because of increased
The Canadian Tire Company operates retail stores throughout Ontario. The company maintains a central warehouse of merchandise to stock the various stores. Because of increased customer demand, the company has found it necessary to acquire additional warehousing facility. The owner of one warehouse has offered to lease space to the company under two alternative arrangements.
Option 1:
Under the first arrangement, the company would be required to pay $50,000 per year for a twenty-year lease agreement. The owner would provide all insurance, maintenance, and other such costs.
Option 2:
Under the second alternative, the company would assume total management of the facility and would pay $400,000 in advance for a twenty-year lease. This alternative would also require the company to pay the estimated $10,000 annual operating expenses.
Assuming the company's cost of capital is 10%; calculate the present value of costs for Option 2?
Based on "Question 3", using the net present value method, determine which lease option would be most appealing to the Canadian Tire Company?
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