A new 10,000-square-meter warehouse next door to the Tyre Corporation is for sal
ID: 2647554 • Letter: A
Question
A new 10,000-square-meter warehouse next door to the Tyre Corporation is for sale for $450,000. The terms offered are $100,000 down and the balance to be paid in 60 equal monthly payments based on 15% annual interest. It is estimated that the warehouse would have a resale value of $600,000 at the end of five years.
Tyre has the cash and could buy the warehouse but does not need all the warehouse space at this time. The Johnson Company next door has offered to lease half the space of the new warehouse for $2,500 per month.
Tyre presently rents and uses 7,000 square meters of warehouse space for $2,700 a month. Tyre has the option of reducing the rented floor space to 2,000 square meters, in which case the rent would be $1,000 per month. Further Tyre could quit renting the warehouse space entirely. Tom Clay, the young engineer for Tyre is considering three alternatives:
A) Buy the new warehouse and leas the Johnson Company half of the space. In turn, the Tyre-rented space would be reduced to 2,000 square meters
B) Buy the new warehouse and cease renting any warehouse space.
C) Continue as is, with 7,000 square meters of rental space.
Use any technique we have used to date (except payback because it won
Explanation / Answer
Monthly Payment of Loan = pmt(rate,nper,pv,fv)
Monthly Payment of Loan = pmt(15%/12,60,-350000,0)
Monthly Payment of Loan = $ 8236.48
A) Buy the new warehouse and leas the Johnson Company half of the space. In turn, the Tyre-rented space would be reduced to 2,000 square meters
Net Present Value = -100000 - (8236.48- 2500 - 1700) *PVIFA(12%/12,60) +600000*PVIF(12%/12,60)
Net Present Value= -100000 - 4036.48*44.95504 + 600000*0.55045
Net Present Value = $ 48,809.88
B) Buy the new warehouse and cease renting any warehouse space.
Net Present Value = -100000 - (8236.48- 2700) *PVIFA(12%/12,60) +600000*PVIF(12%/12,60)
Net Present Value= -100000 - 5536.48*44.95504 + 600000*0.55045
Net Present Value = - $ 18,622.68
C) Continue as is, with 7,000 square meters of rental space.
Net Present Value = - 2700 *PVIFA(12%/12,60)
Net Present Value= -2700*44.95504
Net Present Value = - $ 121,378.61
Decision : Select Alternative A as its NPV is positive
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