Agata Bertina wants to open a new factory in New Jersey. The company can either purchase or lease the factory. There are three options available for Agata Bertina : 1. Purchase a factory with a useful life of 10 years today for $700,000 in cash. This factory has no additional space for rent. 2. Lease a factory with annual lease payments of $45,000 for 10 years. Payments are made at the beginning of each year. 3. Purchase a factory with a useful life of 10 years today for $745,000. In addition, the company can rent some additional space for annual rent of $4,000. Assume Agata Bertina would receive the rental payments at the end of each year. Requirement: Interest is compounded annually. Which option should Agata Bertina choose given a 3% interest rate? First, calculate the present value of each option. (Ignore any depreciation expense for purposes of this problem. Use the present value and future value tables, the formula method, a financial calculator, or a spreadsheet for your calculations. If using present and future value tables or the formula method, use factor amounts rounded to five decimal places, X.XXXXX. Round any intermediary currency calculations and your final answer to the nearest cent, $X.XX.) Present value Option 1 Part 2 Option 2 Part 3 Option 3 Part 4 Agata Bertina should select ▼ Option 3 Option 2 Option 1 because this option results in the ▼ largest smallest present value.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Agata Bertina wants to open a new factory in New Jersey. The company can either purchase or lease the factory. There are three options available for Agata Bertina :

1.	Purchase a factory with a useful life of 10 years today for $700,000 in cash. This factory has no additional space for rent.
2.	Lease a factory with annual lease payments of $45,000 for 10 years. Payments are made at the beginning of each year.
3.	Purchase a factory with a useful life of 10 years today for $745,000. In addition, the company can rent some additional space for annual rent of $4,000. Assume Agata Bertina would receive the rental payments at the end of each year.

Requirement: Interest is compounded annually. Which option should Agata Bertina choose given a 3% interest rate?

First, calculate the present value of each option. (Ignore any depreciation expense for purposes of this problem. Use the present value and future value tables, the formula method, a financial calculator, or a spreadsheet for your calculations. If using present and future value tables or the formula method, use factor amounts rounded to five decimal places, X.XXXXX. Round any intermediary currency calculations and your final answer to the nearest cent, $X.XX.)

	Present value
Option 1

Part 2

Option 2

Part 3

Option 3

Part 4

Agata Bertina

should select

▼

Option 3

Option 2

Option 1

because this option results in the

▼

largest

smallest

present value.

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