The Carla Inc

Accounting Sep 19, 2020

The Carla 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, Carla has decided to locate a new factory in the Panama City area. Carla 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 very similar buildings that will meet their needs.

Building A: Purchase for a cash price of $613,000, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $71,950 being made at the beginning of the year.

Building C: Purchase for $655,100 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,900. Rental payments will be received at the end of each year. The Carla Inc. has no aversion to being a landlord.

In which building would you recommend that The Carla Inc. locate, assuming a 12% cost of funds?

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