Reference no: EM133522313
Question: Top Management Inc. owns a group of gas stations. The company is planning to open a newlocation and a building site has been located in a rapidly growing area. Brian Williams, thecompany's vice president in charge of new business development is trying to determine if Topmanagement should buy or lease the property. The initial research found the following:Purchasing the building
• The building can be bought and refurbished for $850,000, paid for with an immediatedown payment of $350,000 and payment of $175,000 per year over the next 4 years.
• Property taxes of $7,500 per year, insurance $8,000 per year, and repairs $4,500 per yearfor a total $20,000 per year would be paid each year for 18 years.
• The building would be sold at the end of 18 years for $500,000.Leasing the building
• Security deposit of $8,000 to be paid immediately. This deposit will be returned at theend of the lease (year 18).
• First lease payment of $120,000 per year to be paid immediately
• The other lease payments of $120,000 per year to be paid in years 1 to 17.
• Repairs $4,500 per year to be paid each year for 18 years
• Property taxes and insurance will be paid by the owner of the buildingTop Management Inc. requires a 12 per cent rate of return.
Required: Discuss the case using the format below. In your submission, be sure to use the NPV approachto advise whether or not Top management should buy or lease the building. Be sure to clearly state all your assumptions.
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