Reference no: EM131183108

Delen is considering opening an office in a new market that would allow it to increase it annual sales by $ 2.5 million. Cost of sales is estimated to be 40% of the sales and corporate overheads would increase by $300000, not including the cost of either acquiring or leasing office space. Th e company will have to invest $ 2.5 million in office furniture, office equipment and other upfront costs associated with opening the new office considering the costs of owning or leasing the office space. A small office building could be purchased at for sole use by the corporation at $3.9 million of which $600000 of the purchase price would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in the 30% tax bracket. An investor is willing to purchase the building and lease it to the corporation at $ 450000 per year for a term of 15 years with the corporation paying all the real estate expenses. Real estate expenses are estimated at 50% of the lease payments. Estimates are that the property value will increase over 15 year lease term to a sale of 4$4.9 million at the end of the years. If the property is purchased, it would be financed with an interest only mortgage of $ 2,730,000 at an interest rate of 10% with balloon payment due after 15 years. Calculate the IRR and advise client whether to lease or own property