Bella D’oro wants to open a new factory in New Jersey. The company can either purchase or lease the factory. There are three options available for Bella D’oro:
1. Purchase a factory with a useful life of 20 years today for $ 500,000 in cash. This factory has no additional space for rent.
2. L ease a factory with annual lease payments of $ 50,000 for 20 years. Payments are made at the beginning of each year.
3. Purchase a factory with a useful life of 20 years today for $ 550,000. In addition, the company can rent some additional space for annual rent of $ 5,000. Assume Bella D’oro would receive the rental payments at the end of each year. Interest is compounded annually. Which option should Bella D’oro choose given a 10% interest rate?