The headquarters building owned by a rapidly growing company is not large enough for the company's current needs. A search for larger quarters revealed two new alternatives that would provide sufficient room, enough parking, and the desired appearance and location. The company now has three options:
• Option 1: Lease the new quarters for $ 144,000 per year.
• Option 2: Purchase the new quarters for $800,000, including a $150,000 cost for land.
• Option 3: Remodel the current headquarters building.
It is believed that land values will not decrease over the ownership period, but the value of all structures will decline to 10% of the purchase price in 30 years. Annual property tax payments are expected to be 5% of the purchase price. The present headquarters building is already paid for and is now valued at $300,000. The land it is on is appraised at $60,000. The structure can be remodeled at a cost of $300,000 to make it comparable to other alternatives. However, the remodeling will occupy part of the existing parking lot. An adjacent, privately owned parking lot can be leased for 30 years under an agreement that the first year's rental of $9,000 will increase by $500 each year. The annual property taxes on the remodeled property will again be 5% of the present valuation, plus the cost of remodeling. The new quarters are expected to have a service life of 30 years, and the desired rate of return on investments is 12%. Assume that the firm's marginal tax rate is 40% and that the new building and remodeled structure will be depreciated under MACRS using a real-property recovery period of 39 years. If the annual upkeep costs are the same for all three alternatives, which one is preferable?