Should WMM lease or construct their own production facility Option 1: Construct Costs to incur:

Actual expenditure towards buying land,

 construct building and getting ready for use                       $ 500,000
Taxes, insurance, and repairs (per year)                                 $ 20,000
Intended years of use                                                                          18
Projected market value in 18 years                                     $ 1,000,000

Budgeted maximum expenditure towards buying land, 

construction of building and getting ready for use.            $ 500,000
Remainder in four payments of;                                             $ 175,000
Option 2:                                                                                           Lease
Intended years of use                                                                         18
First lease payment due now                                                  $ 100,000
Rest of the lease payments (years 2-17)                               $ 120,000
Operating costs to be paid by WMM
Property taxes (annual)                                                             $ 17,000
Insurance (annual)                                                                     $ 18,000
Initial one-time deposit, will be returned in year 18            $   8,000
Required rate of return                                                                   16%
Methodology:
The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or construction.
Based on the analysis, they will recommend the preferred option (construction or leasing).

Answer rating: 100% (QA)

Net present value NPV is the difference between the present value of cash inflows and the present va... View the full answer