Question

The XYZ Company has a choice between two warehouses. A lease at location A costs $1000 per month with a payment of $2000 up front to guarantee the 3 year lease. Location B would cost $1200 per month and would be leased from month to month. The anticipated revenue in either location is $1500 per month. The estimated rate of return is 10% per year. Using net present value, determine which location would be the better choice.

Answer 1

Answer:

A is better choice because present value of the cost is lower

Explanation:

given data

lease A costs = $1000 per month

payment = $2000

lease  B cost = $1200 per month

revenue either =  $1500 per month

rate of return = 10% per year = \frac{0.10}{12}  = 0.00833

solution

we find here first Cost of first lease that is express as

Cost of first lease = 2000 + $\frac{1000}{1+0.00833}$ +  $\frac{1000}{(1+0.00833)^2}$  +  $\frac{1000}{(1+0.00833)^3}$      .............  $\frac{1000}{(1+0.00833)^{36}}$

solve it we get

Cost of first lease =  $32,991.24

and

as that Cost of second lease is here

Cost of second lease =    $\frac{1200}{1+0.00833}$ +  $\frac{1200}{(1+0.00833)^2}$  +  $\frac{1200}{(1+0.00833)^3}$      .............  $\frac{1200}{(1+0.00833)^{36}}$

solve we get

Cost of second lease = $37,189.48

so we can see that at A is better choice because present value of the cost is lower