Sunny Side wants you to make the decision to either purchase warehouse space on the spot market or sign a three-year lease for the warehouse. One thousand square feet of warehouse space is required for every 3000 units of demand, and the current demand for your company is 560,000 units per year. You are forecasting demand to either increase or decrease at a rate of 11% with a probability of increasing at 53% and a probability of decreasing at 35%. The probabilities are independent and unchanged from year to year. You have two options you can sign a three-year lease for current demand at a price of $2.10 per square foot per year or purchase warehouse space on the spot market for $3.40 per square foot. Spot prices may go up by 6 percent with a probability of 52% or may go down by 3 percent with a probability of 50%. The probabilities are independent and unchanged from year to year Your revenue for the product is $3.56 per unit handled. You use a discount rate of 11%. 

1. Calculate the Spot NPV and calculate the lease NPV.

2. Compare both of them, which one is the better choice and why?

Answer rating: 100% (QA)

1 Net present value is a tool of Capital budgeting to analyze the profitability of a project or investment It is calculated by taking the difference between the present value of cash inflows and prese... View the full answer