1) Analysis of Alternatives
The balck 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 Knight has decided to locate n new factory in the Panama City area. Balck Knight 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 building.
Building A: purchase for a cash price $600,000, useful life 25 years
Building B: Lease for 25 years with annual lease payment of $69,000 being made at the beginign 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 payment will be recieved at the end of each year. The black Knight Inc. has no aversion to being a lanlord.
Instruction which building would recommend that Balck Knight Inc. Locate, assuming a 12% cost of funds?
2. (investment Decision) Andrew Bogut just recieved a signing bonus of $1,000,000. His plan is to invest this payment in a fund that will earn 8%, compounded annually.
Instruction
(a) If Bogut plans to establish the AB Foundation once the fund grows to $1,999,000, how many years until he can establish the foundation?
(b) Instead of investment the entire $1,000,000, Bogut invest $300,000 today and plans to make 9 equal annual investments into the fund beginning one year from today. what amount should the payments be if Bogut plans to establish the $1,999,000 foundation at the end of 9 years?
3. (Analysis of Lease vs. Purchase) Dunn Inc. owns and operates a number of hardware stores in the New England region. Recently the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities. Purchase: The Company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,850,000. An immediate down payment of $400,000 is required, and the remaining $1,450,000 would be paid off over 5 years at $350,000 per year (including interest; payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $500,000. As the owner of the property, the company will have the following out-of-pocket expenses each period.