Wood Inc. has decided to locate a new factory in the LA area in order to increase
Question:
Wood Inc. has decided to locate a new factory in the LA area in order to increase market share. Wood will either buy or lease a site depending upon which is more advantageous. The site location committee has narrowed down the available sites to the following two very similar buildings that will meet their needs.Wood's cost of funds is 10%.
Building A: Purchase for a cash price of $700,000, useful life 25 years.
Building B: Lease for 25 years with annual lease payments of $72,000 being made at the beginning of the year.
Question 1: How much is the present value of Building B?
Question 2: Which building should Pitchfork select?
DATA: PVOA (10%, 25n) is 9.07704; PVOA (10%,24n) is 8.98474; PVAD (10%,25n) is 9.98474; and PVAD (10%, 24n) is 9.88322