Chapter 6, Problem 12E

To determine

Future value: A nominal value of an asset or investment at a specific period with an assumed interest rate is termed future value. Future value can be computed by multiplying the amount invested at the present with the future value factor.

Given scenario: It is given that BK Incorporation has an option of buying or leasing a building. It has three alternatives in the selection of building. The options are as follows:

Building A can be purchased for $600,000 for which the useful life is 25 years. The second option of leasing Building B $69,000 for 25 years can be exercised at the beginning of the year. The third option is to purchase the building for $650,000 cash. However, it has a bigger space that can earn a net annual rental of $7,000 at the end of the year.

To determine the best building for BK Incorporation by assuming 12% cost of funds.