E6-12B (Analysis of Alternatives) Bandit Inc., manufactures ice tea and would li

Question

E6-12B (Analysis of Alternatives) Bandit Inc., manufactures ice tea and would like to increase its market share in the North. In order to do so, Bandit has decided to locate a new factory in the Cedar Rapid area. Bandit 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 $1,500,000, useful life 25 years.

Building B: Lease for 25 years with annual lease payments of $125,000 being made at the beginning of the year.

Building C: Purchase for $1,750,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $21,000. Rental payments will be received at the end of each year. Bandit Inc. has no aversion to being a landlord.

Instructions In which building would you recommend that Bandit Inc. locate, assuming a 8% cost of funds

Explanation / Answer

I would recommend Building C because it is more profitable than other two buildings

Assuming that all building will be used for 25 years.

Building A = $ 1500000 x 25 = $ 37,500,000

Building B = $ 125000 x 25 =    $ 3,125,000

Building C = $ 1750000 –( $ 21000 x 25)

                  = $ 1750000 = 525000

                                        = $ 1,225,000

So Building C is more Profitable.

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