3. An engineering firm is looking for a new office. The lease term will be 15 ye

Question

3. An engineering firm is looking for a new office. The lease term will be 15 years. The firm is considering Office A and Office B. Office A is 8,500 sq. ft. and rents for $21/sq. ft. per year. The rent will not increase over the life of the lease. The rent is payable in equal monthly payments. Office B is 7,000 sq. ft. and rents $15/sq. ft. initially and will increase by $1/sq. ft. each year. The rent is payable in equal monthly payments. The initial cost to furnish and equip the office is $75,000. The office furniture will have a salvage value of $8,000 at the end of the lease period. Assume an interest rate of 6%. What is the lower present value of the two office options?

Explanation / Answer

PLANT A

PLANT B

Conclusion : Plant B has lower present value of two options

Year Rent Salvage value PV factor @ 6% Present value 0 1             75,000.00 1 178500 - 0.943          168,396.23 2 178500 - 0.890          158,864.36 3 178500 - 0.840          149,872.04 4 178500 - 0.792          141,388.72 5 178500 - 0.747          133,385.58 6 178500 - 0.747          133,385.58 7 178500 - 0.665          118,712.69 8 178500 - 0.627          111,993.11 9 178500 - 0.592          105,653.88 10 178500 - 0.558             99,673.47 11 178500 - 0.527             94,031.57 12 178500 - 0.497             88,709.03 13 178500 - 0.469             83,687.77 14 178500 - 0.442             78,950.72 15 178500 -8000 0.417             71,143.69 TOTAL       1,737,848.45

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