Notting hill hospital needs to expand its facilities and desires to obtain a new building on a
Question:
Notting hill hospital needs to expand its facilities and desires to obtain a new building on a piece of property adjacent to its present location. Two options are available to Notting Hills, as follows:
Option 1: Buy the property, erect the building, and install the fixtures at a total cost of ₱ 600,000. This cost would be paid off in five installments: an immediate payment of ₱ 200,000, and a payment of ₱ 100,000 at the end of each of the next four years. The annual cash operating costs associated with the new facilities are estimated to be ₱ 12,000 per year. The new facilities would be occupied for thirteen years, and would have a total resale value of ₱ 300,000 at the end of the 13-year period.
Option 2: A leasing company would buy the property and construct the new facilities for Notting Hill which would then be leased back to Notting Hill at an annual lease cost of ₱ 70,000. The lease period would run for 13 years, with each payment being due at the BEGINNING of the year. Additionally, the company would require an immediate ₱ 10,000 security deposit, which would be returned to Notting Hill at the end of the 13-year period. Finally, Notting Hills would have to pay the annual maintenance cost of the facilities, which is estimated to be ₱ 4,000 per year. There would be no resale value at the end of the 13-year period under this option.
The hospital uses a discount rate of 14% and the total-cost approach to net present value analysis in evaluating its investment decisions. Ignore income taxes in this problem.
Required:
1. What is the net present value of all cash flows under Option 1 (rounded to the nearest thousand pesos)?
2. What is the net present value of all the annual lease payments of ₱ 70,000 under Option 2 (rounded to the nearest hundred pesos)?
3. What is the net present value of all cash flows associated with maintenance costs under Option 2 (rounded to the nearest hundred pesos)?
Expert Answer:
1 What is the net present value of all cash flows under Option 1 Present value of Instalment payment ... View the full answer
