The headquarters building owned by a rapidly growing company isnot large enough for theâ company's current needs. A search forlarger quarters revealed two new alternatives that would providesufficientâ room, enoughâ parking, and the desired appearance andlocation. If the annual upkeep costs are the same for all threeâalternatives, which one isâ preferable?
The company now has three options:
⢠Option 1: Lease the new quarters for $120,000 per year(payments at the beginning of each year).
⢠Option 2: Purchase the new quarters for $750,000, including a$190,000 cost for land.
⢠Option 3: Remodel the current headquarters building.
It is believed that land values will not decrease over theownership period, but the value of all structures will decline to %of the purchase price in 30 years. Annual property tax payments areexpected to be % of the purchase price. The present headquartersbuilding is already paid for and is now valued at $ . The land itis on is appraised at $ . The structure can be remodeled at a costof $ to make it comparable to other alternatives. However, theremodeling will occupy part of the existing parking lot. Anadjacent, privately owned parking lot can be leased for 30 yearsunder an agreement that the first year's rental of $ will increaseby $ each year. The annual property taxes on the remodeled propertywill again be % of the present valuation, plus the cost ofremodeling. The new quarters are expected to have a service life of30 years, and the desired rate of return on investments is %.Assume that the firm's marginal tax rate is % and that the newbuilding and remodeled structure will be depreciated under MACRSusing a real property recovery period of 39 years.
The headquarters building owned by a rapidly growing company isnot large enough for theâ company's current needs. A search forlarger quarters revealed two new alternatives that would providesufficientâ room, enoughâ parking, and the desired appearance andlocation. If the annual upkeep costs are the same for all threeâalternatives, which one isâ preferable?
The company now has three options:
⢠Option 1: Lease the new quarters for $120,000 per year(payments at the beginning of each year).
⢠Option 2: Purchase the new quarters for $750,000, including a$190,000 cost for land.
⢠Option 3: Remodel the current headquarters building.
It is believed that land values will not decrease over theownership period, but the value of all structures will decline to %of the purchase price in 30 years. Annual property tax payments areexpected to be % of the purchase price. The present headquartersbuilding is already paid for and is now valued at $ . The land itis on is appraised at $ . The structure can be remodeled at a costof $ to make it comparable to other alternatives. However, theremodeling will occupy part of the existing parking lot. Anadjacent, privately owned parking lot can be leased for 30 yearsunder an agreement that the first year's rental of $ will increaseby $ each year. The annual property taxes on the remodeled propertywill again be % of the present valuation, plus the cost ofremodeling. The new quarters are expected to have a service life of30 years, and the desired rate of return on investments is %.Assume that the firm's marginal tax rate is % and that the newbuilding and remodeled structure will be depreciated under MACRSusing a real property recovery period of 39 years.
