Appendix One (Construct or lease) Objective: Should WLW lease or construct their own production facility Option 1: Construct Costs to incur: Buying land, construct building and getting ready for use Taxes, insurance, and repairs (per year) Intended years of use Projected market value in 20 years Maximum down payment WLW can make Remainder in four payments of; Revenue opportunity Building annex will be leased to a tenant and will generate a lease revenue (per year) for 10 years Option 2: Lease Intended years of use First lease payment due now Rest of the lease payments (years 2-20) Operating costs to be paid by WLW Repairs (annual) Maintenance (annual) Initial one-time deposit, will be returned in year 20 Required rate of return $ 360,000 $ 34,000 20 $ 1,600,000 $ 500,000 $ 160,000 $60,000 20 $ 90,000 $ 90,000 $9,000 $ 26,000 $ 40,000 15% Methodology: The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or construction. Based on the analysis, they will recommend the preferred option (construction or leasing).
Appendix One (Construct or lease) Objective: Should WLW lease or construct their own production facility Option 1: Construct Costs to incur: Buying land, construct building and getting ready for use Taxes, insurance, and repairs (per year) Intended years of use Projected market value in 20 years Maximum down payment WLW can make Remainder in four payments of; Revenue opportunity Building annex will be leased to a tenant and will generate a lease revenue (per year) for 10 years Option 2: Lease Intended years of use First lease payment due now Rest of the lease payments (years 2-20) Operating costs to be paid by WLW Repairs (annual) Maintenance (annual) Initial one-time deposit, will be returned in year 20 Required rate of return $ 360,000 $ 34,000 20 $ 1,600,000 $ 500,000 $ 160,000 $60,000 20 $ 90,000 $ 90,000 $9,000 $ 26,000 $ 40,000 15% Methodology: The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or construction. Based on the analysis, they will recommend the preferred option (construction or leasing).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Appendix One (Construct or lease)
Objective: Should WLW lease or construct their own production facility
Option 1: Construct
Costs to incur:
Buying land, construct building and getting ready
for use
$ 360,000
Taxes, insurance, and repairs (per year) $ 34,000
Intended years of use 20
Projected market value in 20 years $ 1,600,000
Maximum down payment WLW can make $ 500,000
Remainder in four payments of; $ 160,000
Revenue opportunity
Building annex will be leased to a tenant and
will generate a lease revenue (per year) for 10
years
$60,000
Option 2: Lease
Intended years of use 20
First lease payment due now $ 90,000
Rest of the lease payments (years 2-20) $ 90,000
Operating costs to be paid by WLW
Repairs (annual) $ 9,000
Maintenance (annual) $ 26,000
Initial one-time deposit, will be returned in year
20
$ 40,000
Required
Methodology:
The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or
construction.
Based on the analysis, they will recommend the preferred option (construction or leasing
Transcribed Image Text:Appendix One (Construct or lease)
Objective: Should WLW lease or construct their own production facility
Option 1: Construct
Costs to incur:
Buying land, construct building and getting ready
for use
Taxes, insurance, and repairs (per year)
Intended years of use
Projected market value in 20 years
Maximum down payment WLW can make
Remainder in four payments of;
Revenue opportunity
Building annex will be leased to a tenant and
will generate a lease revenue (per year) for 10
years
Option 2: Lease
Intended years of use
First lease payment due now
Rest of the lease payments (years 2-20)
Operating costs to be paid by WLW
Repairs (annual)
Maintenance (annual)
Initial one-time deposit, will be returned in year
20
Required rate of return
$360,000
$ 34,000
20
$ 1,600,000
$ 500,000
$ 160,000
$60,000
20
$ 90,000
$ 90,000
$9,000
$ 26,000
$ 40,000
15%
Methodology:
The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or
construction.
Based on the analysis, they will recommend the preferred option (construction or leasing).
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