MGMT 8500: $23-capstone -V30 Appendix One (Construct or lease) Objective: Should FFT lease or construct their own production facility Option 1: Construct Costs to incur: Buying land, construct building and getting ready $1,100,000 for use (FFT has these funds available in their bank account today so no mortgage is needed) Taxes, insurance, and repairs (per year) Intended years of use Projected market value in 15 years Option 2: Lease Intended years of use Deposit required today (this deposit will be returned to FFT when the lease contract is complete is 15 years) Annual lease payment Property taxes (annual) to be paid by FFT Insurance (annual) to be paid by FFT Required rate of return $90,000 15 $ 1,400,000 15 $ 90,000 $ 120,000 $ 20,000 $ 16,000 10% 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).

MGMT 8500: $23-capstone -V30 Appendix One (Construct or lease) Objective: Should FFT lease or construct their own production facility Option 1: Construct Costs to incur: Buying land, construct building and getting ready $1,100,000 for use (FFT has these funds available in their bank account today so no mortgage is needed) Taxes, insurance, and repairs (per year) Intended years of use Projected market value in 15 years Option 2: Lease Intended years of use Deposit required today (this deposit will be returned to FFT when the lease contract is complete is 15 years) Annual lease payment Property taxes (annual) to be paid by FFT Insurance (annual) to be paid by FFT Required rate of return $90,000 15 $ 1,400,000 15 $ 90,000 $ 120,000 $ 20,000 $ 16,000 10% 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).

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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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

MGMT 8500: $23-capstone -V30
Appendix One (Construct or lease)
Objective: Should FFT lease or construct their own production facility
Option 1: Construct
Costs to incur:
Buying land, construct building and getting ready $1,100,000
for use (FFT has these funds available in their
bank account today so no mortgage is needed)
Taxes, insurance, and repairs (per year)
Intended years of use
Projected market value in 15 years
Option 2: Lease
Intended years of use
Deposit required today (this deposit will be
returned to FFT when the lease contract is
complete is 15 years)
Annual lease payment
Property taxes (annual) to be paid by FFT
Insurance (annual) to be paid by FFT
Required rate of return
$90,000
15
$ 1,400,000
15
$ 90,000
$ 120,000
$ 20,000
$ 16,000
10%
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).
Page 7 | 12

Marking key
Item
Appendix 1 - v30
Appendix 2 - v30
Year(s) Amount of Cash Flows Factor
Appendix 3 - v30
Present Value of Cash Flows
Appendix 4 - v30

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