Brubaker Inc., a manufacturer of high-sugar, low-sodium, low-cholesterol frozen

Question

Brubaker Inc., a manufacturer of high-sugar, low-sodium, low-cholesterol frozen dinners, would like to increase its market share in the Sunbelt. In order to do so, Brubaker has decided to locate a new factory in the Panama City, Florida, area. Brubaker 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 three buildings.
    Building A: Purchase for a cash price of $610,000, useful life 25 years.
    Building B: Lease for 25 years with annual lease payments of $70,000 being made at the beginning of the year.
    Building C: Purchase for $650,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $6,000. Rental payments will be received at the end of each year. Brubaker Inc. has no aversion to being a landlord.
    
      
        Instructions
      
    
    In which building would you recommend that Brubaker Inc. locate, assuming a 12% cost of funds?

Explanation / Answer

We will take out the present value of each of the alternative

A: PV = 610000

B: PV = 70000 + 70000*(P/A,12%,24) = 614600

C: PV = 650000- 6000*(P/A,12%,25) = 602941

The minimum will be selected that is option C

Where, [P/A, r %, n] = [((1+r)^n-1)/(r(1+r)^n]

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