Should WMM lease or construct their own production facility Option 1: Construct Costs to incur: Actual expenditure towards buying land, construct building and getting ready for use $ 500,000 Taxes, insurance, and repairs (per year
Should WMM lease or construct their own production facility Option 1: Construct Costs to incur:
Actual expenditure towards buying land,
construct building and getting ready for use $ 500,000
Taxes, insurance, and repairs (per year) $ 20,000
Intended years of use 18
Projected market value in 18 years $ 1,000,000
Budgeted maximum expenditure towards buying land,
construction of building and getting ready for use. $ 500,000
Remainder in four payments of; $ 175,000
Option 2: Lease
Intended years of use 18
First lease payment due now $ 100,000
Rest of the lease payments (years 2-17) $ 120,000
Operating costs to be paid by WMM
Property taxes (annual) $ 17,000
Insurance (annual) $ 18,000
Initial one-time deposit, will be returned in year 18 $ 8,000
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).
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