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AH $12-4$ Net Present Value Analysis, Least$-$Cost Decision, Uncertain Cash Flows LO $12-2,$ LO $12-4$

$[$The following information applies to the questions displayed below.$]$

The owners of Annie B$\text{'}$s Homemade Ice Cream are deciding between buying land and building a $1,800$ square$-$feet ice cream shop or signing a five$-$year lease for $1,500$ square feet of retail space. If the company decides to buy land and build an ice cream shop, the total cost of the land, building, and paved parking lot is $\backslash (\backslash$$ $1,200,000\backslash ).$ At the end of five years, the company estimates the market value of this commercial property would be $\backslash (\backslash$$ $1,300,000\backslash ).$ If the company chooses to sign a lease, it would cost $\backslash (\backslash$$ $350,000\backslash )$ to transform the unfinished leased space into an ice cream shop.

For simplicity, Annie B$\text{'}$s is assuming the following items would be the same across the five$-$year time horizon under the buy$-$and$-$build and lease alternatives:

$-$ Annual sales

$-$ Ingredients costs

$-$ Labor costs

$-$ Equipment costs

$-$ Working capital invested and released

$-$ All other operating costs besides those mentioned below

If the company chooses the lease option, it would pay annual rent of $\backslash$$$36,000.$ If Annie B$\text{'}$s chooses to buy$-$and build, some of its operating costs would be higher than the lease option. For example, under the buy$-$and$-$build option, Annie B$\text{'}$s would pay higher property taxes, insurance premiums, and utility expenses. The annual amount by which these operating costs exceed the lease option is $\backslash (\backslash$$ $15,000\backslash ).$

Click here to view Exhibit $12$B$-1$ and Exhibit $12$B$-2,$ to determine the appropriate discount factor$($s$)$ using table. Requirement $1$

Required:

$1.$ Assuming a discount rate of $\backslash (10\backslash \%\backslash )$ and using a five$-$year time horizon:

a$.$ What is the net present value of the relevant cash flows associated with the lease option?

Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign.

b$.$ What is the net present value of the relevant cash flows associated with the buy$-$and$-$build option?

Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Negative amount should be indicated with a minus sign.

c$.$ Which of the two options is the least$-$cost alternative?

Answer is complete but not entirely correct.