Jensen Company owns a building in a suburban industrial park. Itpurchased the building four years ago for $3 million. It is nowdeciding whether to lease the building or to use it as adistribution center. It could be leased immediately. Given today’smarket conditions, lease income of $120,000 per year would beexpected. To convert the building to make it useful as adistribution center would require an immediate expenditure of$400,000. Having the distribution center at this location wouldprovide Jensen with $140,000 per year in cost savings, at today’sprices. The cash flows associated with this decision are not veryrisky, so a real discount rate of just 3% per year is required.Inflation of 2% per year is expected in the future. For simplicity,assume that: (i) there are no taxes, (ii) the building could beleased or used as a distribution center forever, (iii) ongoing cashflows, including rents and distribution cost savings, wouldincrease with the overall inflation rate, and (iv) all cash flowsexcept the initial $400,000 would occur at year end. (the lastassumption implies that one year of inflation would affect thefirst lease payment and distribution cost saving) (a) Provide a NPVanalysis and a recommendation of how the building should beused.(b) Is the outcome of your NPV analysis sensitive to changesin the assumed inflation rate?