Indiva is a small business located in London, Ontario that legally grows medical cannabis indoors in a
Question:
Indiva is a small business located in London, Ontario that legally grows medical cannabis indoors in a 900 square meter building. Their annual production in 2020 is 230 kilograms. Cannabis production requires a lot of energy in the form of LED lighting which is currently supplied by London Hydro at a 2020 cost of 8 cents per kWh. It takes 2,100 kWh to produce 1 kilogram of cannabis. In order to reduce the high cost of electricity, Indiva is considering installing solar panels on the roof of its building at the beginning of 2021 at a capital cost of $275,000 which could potentially save 100% of existing hydro costs. Given that the cost of hydro is expected to rise by an average of 3.1% each year over the 20 year life time of the solar panels (2021 to 2040), Indiva expects that this would be a good investment. In addition to saving money, the company would also be reducing its carbon emissions. It is also expected that with increased use of solar panels in the future, there will be a thriving recycling industry and Indiva's solar panels will possess value as scrap material at the end of their useful life and could therefore be sold at the end of 2040 for $10,000.
Indiva is planning on expanding its operations in about 5 years time. Two properties that could be used for the future expansion have come on the market at the beginning of 2021; property A is listed at $1,200,000 and is currently leased to several small businesses bringing in an annual net income of $190,000; property B is listed at $700,000 and is currently rented to residential tenants for net $4,200 per month. Assume that the value of real estate will increase by slightly over the rate of inflation of 2.5% each year and that the lease and rental amounts will not change.
Required:
At the end of 2025, which property will generate the highest return on investment?
Auditing The Art And Science Of Assurance Engagements
ISBN: 9780136692089
15th Canadian Edition
Authors: Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan, Joanne C. Jones