The XYZ Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $1.5 million. The projected cost of goods sold is estimated to be 50 per cent of sales and corporate overhead would increase by $200,000 not including the cost of either acquiring or leasing office space. XYZ Corporation will also have to invest $1.3 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 $1.8 million, of which 12.5 per cent of the purchase price would represent land value, and 87.5 per cent would represent building value. The cost of the building would be depreciated over 31.5 years. The corporation is in a 30 per cent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $180,000 per year for a term of 15 years, with the corporation paying all property outgoings which are estimated to be 50 per cent of the lease payments. It is estimated that the property value will increase over the 15-year to $3 million at the end of the 15 years. If the property is purchased, it would be financed with an interest-only mortgage for $1,369,000 at an interest rate of 10 per cent with a balloon payment due after 15 years. Capital gain tax is estimated at $585,000.

Assume all cash flows occur at the end of the year and discount rate is 10 per cent for the XYZ Corporation and the investors. You must show all workings.

a) What is the net present value from opening the office building under the assumption that the corporation leases the office space?

b) What is the net present value from opening the office building under the assumption that the corporation purchases the office space?

c) What is the net present value on the incremental cash flow from the investors perspective?

d) Assume the investor shares 50 per cent of all cash flows with his partner investor on the investment, what are the benefits?

e) What is the net present value on the incremental cash flow from the lenders perspective (assuming 3.5 per cent discount rate)?