Your business must decide whether to rent or sell a building. You have five options that you must consider. The potential buyers/renters are awaiting your response, so that the deal can go to closing. For all options, assume rent is paid at the end of the year (i.e., rent is an ordinary annuity).

Option 1: $1,000,000 in cash today

Option 2: $750,000 in cash today, and $350,000 at the end of year three

Option 3: A tenant will rent the building immediately, paying $175,000 in annual rent for the next 10 years.

Option 4: A tenant will rent the building immediately, paying $125,000 in annual rent for the next 5 years. At the end of the fifth year, the tenant will purchase the building for $1,000,000.

Option 5: A tenant will rent the building two years from now. Starting in year 3, the tenant will pay $250,000 in annual rent for 8 years.

1. What is the present value of option 1 assuming your cost of capital is 10%?

1. What is the present value of option 2 assuming your cost of capital is 10%?

1. What is the present value of option 3 assuming your cost of capital is 10%?

1. What is the present value of option 4 assuming your cost of capital is 10%?

1. What is the present value of option 5 assuming your cost of capital is 10%?

1. Given a 10% cost of capital, which option should you choose if your only consideration is maximizing the present value of the option?

1. For each option, write 1-2 sentences explaining why you might choose that option even if it does not have the highest present value?

1. Which option would you prefer if you run a small business (cash flow ~$100,000)? Why?

1. Which option would you prefer if you run a large business (cash flow ~$10,000,000)? Why?

1. Which option would you prefer if you run a business with cyclical annual sales (i.e., sales fall drastically during an economic downturn)? Why?