Question
The owners of Annie's Homemade Ice Cream are deciding between buying land and building a 1 , 8 0 0 1 , 8 0 0
The owners of Annie's Homemade Ice Cream are deciding between buying land and building a squarefeet ice cream shop or signing a fiveyear lease for 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 $ At the end of five years, the company estimates the market value of this commercial property would be $ If the company chooses to sign a lease, it would cost $ 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 fiveyear time horizon under the buyandbuild 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 $ If Annie's chooses to buyand build, some of its operating costs would be higher than the lease option. For example, under the buyandbuild 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 $ Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using table. Required: Assuming a discount rate of and using a fiveyear time horizon: a What is the net present value of the relevant cash flows associated with the lestion? 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?
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. Required: 1. Assuming a discount rate of 10% 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
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