Question
You are hired by Alghanim Industries to evaluate a lease-buy decision of a building that they need to expand their business. The building is offered
You are hired by Alghanim Industries to evaluate a lease-buy decision of a building that they need to expand their business. The building is offered at a KD 5,000,000 (of which 10% is a land value). The economic life of the building is 50 years. The building value appreciates 3% annually. Instead, Alghanim Industries could lease the building for the next 10 years at KD 300,000 annually, and will increase by 2% annually. If you know that the expansion in asset size will result in (a) the annual sales of Alghanim Industries are expected to increase by KD 1,100,000; (b) the associated operating expenses are expected to increase by KD 120,000; (c) furnishing the building will cost KD 3,000,000, would you recommend leasing or buying the building? Why? (Show the required calculations)
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