O'Neal Consumer Products is in need of 150,000 sq. ft. of warehouse space for its East Coast market, where annual sales are $30,000,000. If a public warehouse is used, annual costs can be estimated as $600,000 for handling and $300,000 for storage. If leased space is used, the annual lease cost is $3 per sq. ft. for a ten-year lease. Leased-space operating cost is $250,000 per year. Equipment and start-up costs are $400,000, which can be depreciated over a seven-year period. A straight-line depreciation schedule is to be used.
The company's required return on projects is 11 percent after taxes, and its federal tax rate is 35 percent per year.
Which alternative makes the best economic sense?