Ekea Company is building a warehouse which is no longer needed now. The warehouse is 90% completed and can be sold for $90,000, which is the cost incurred on the warehouse to date.

If it is sold, Ekea would have to pay the property agent a commission of 1% on sale and the buyer of the warehouse would have to complete the building of the warehouse.

Alternatively, the completed warehouse can be leased for a period of 5 years at $15,000 per year. At the end of the lease, the warehouse could then be sold for $70,000. The completed warehouse would cost a total of $100,000 to build, and will be depreciated over 10 years on straight-line basis.

If the warehouse is to be leased for the 5-year period, Ekea (the lessor) must obtain a permit, which will cost $3,000 per year. The lessee would have to be responsible for the repairs and maintenance of the warehouse, estimated to be $25,000, for the period of the lease.

Required:

Identify and explain which items are relevant and which are irrelevant.

Ignoring qualitative factors and the time value of money, should Ekea sell the partially completed warehouse or complete the construction and lease it out? Use differential analysis to help you make your decision.

What two qualitative factors need to be considered before making a decision?

Answer rating: 100% (QA)

a i Cost of completing the property ie 10000 is irrelevant as it will be incurred in both the alter... View the full answer