E6-12 (Analysis of Alternatives) The Black Knights Inc., a manufacturer of low-s
ID: 2552415 • Letter: E
Question
E6-12 (Analysis of Alternatives) The Black Knights Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the Sunbelt. In order to do so, Black Knights has decided to locate a new factory in the Panama City area. Black Knights 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 $600,000, useful life 25 years. Building B: Lease for 25 years with annual lease payments of $69,000 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 $7,000. Rental payments will be received at the end of each year. The Black Knights Inc. has no aversion to being a landlord. Instructions In which building would you recommend that The Black Knights Inc. locate, assuming a 12% cost of funds? Show work
Explanation / Answer
Answer:-
A: Purchase for a cash price of $600,000, useful life 25 years.
PV=$ 600,000
B: Lease for 25 years with annual lease payments of $69,000 being made at the beginning of the year.
PV=$69,000*8.78432
PV=$ 606,118
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 $7,000.
PV=$650,000-54,901.97
PV=$595,098.03
I would Recommend Building C to Black Kinghts Inc. because the value is less than other two building
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