Reference no: EM132943790

NOTTING HILL HOSPITAL

Notting Hill Hospital needs to expand its facilities and desires to obtain a new building on a piece of property adjacent to its present location. Two options are available to Notting Hill, as follows:

Option 1: Buy the property, erect the building, and install the fixtures at a total cost of Php 60,000. This cost would be paid off in five installments: an immediate payment of Php 200,000 and a payment of Php 100,000 at the end of each of the next four years. The annual cash operating costs associated with the new facilities are estimated to be Php 12,000 per year. The new facilities would be occupied for thirteen years, and would have a total resale value of Php 300,000 at the end of the 13-year period.

Option 2: A leasing company would buy the property and construct the new facilities for Notting Hill which would then be leased back to Notting Hill at a annual fee of Php 70,000. The lease period would run for 13 years, with each payment being due at the BEGINNING of the year. Additionally, the company would require an immediate Php 10,000 security deposit, which would be returned to Notting Hill at the end of the 13-year period. Finally, Notting Hill would have to pay the annual maintenance cost of the facilities, which is estimated to be Php 4,000 per year. There would be no resale value at the end of the 13-year period under this option.

The hospital uses a discount rate of 14% and the total-cost approach to net present value analysis in evaluating its investment decisions. Ignore income taxes in this problem.

Required:

Problem 1. What is the net present value of all cash flow under Option 1 (rounded to the nearest thousand pesos).

Problem 2. What is the net present value of all the annual lease payments of Php 70,000 under option 2 (rounded to the nearest hundred pesos).

Problem 3. What is the present value of all cash flows associated with the maintenance costs under option 2 (rounded to the nearest hundred pesos).