Question: A new 10,000~square-meter warehouse next door to the Tyre Corporation is for sale for $450,000. The terms offered are $100,000 down with the balance being

A new 10,000~square-meter warehouse next door to the Tyre Corporation is for sale for $450,000. The terms offered are $100,000 down with the balance being paid in 60 equal monthly payments based on 15% interest. It is estimated that the warehouse would have a resale value of $600,000 at the end of 5 years. Tyre has the needed cash available and could buy the warehouse but does not need all the warehouse space at this time. The Johnson Company has offered to lease half the new warehouse for $2500 a month. Tyre presently rents and utilizes 7000 square meters of warehouse space for $2700 a month. It has the option of reducing the rented space to 2000 square meters, in which case the monthly rent would be $1000 a month. Further, Tyre could cease renting warehouse space entirely. Tom Clay, the Tyre Corp. plant engineer, is considering three alternatives:

1. Buy the new warehouse and lease the Johnson Company half the space. In turn, the Tyre-rented space would be reduced to 2000 square meters.

2. Buy the new warehouse and cease renting any warehouse space.

3. Continue as is, with 7000 square meters of rented warehouse space. Based on a 20% minimum attractive rate of return, which alternative should be selected?

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