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Objective: Should WMM lease or construct their own production facility Option 1: Construct Costs to...

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Accounting

Objective: Should WMM lease or construct their own production facility Option 1: Construct Costs to incur: Actual expenditure towards buying land, construct building and getting ready for use $ 500,000 Taxes, insurance, and repairs (per year) $ 20,000 Intended years of use 18 Projected market value in 18 years $ 1,000,000 Budgeted maximum expenditure towards buying land, construction of building and getting ready for use. $ 500,000 Remainder in four payments of; $ 175,000 Option 2: Lease Intended years of use 18 First lease payment due now $ 100,000 Rest of the lease payments (years 2-17) $ 120,000 Operating costs to be paid by WMM Property taxes (annual) $ 17,000 Insurance (annual) $ 18,000 Initial one-time deposit, will be returned in year 18 $ 8,000 Required rate of return 16% Methodology: The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or construction. Based on the analysis, they will recommend the preferred option (construction or leasing).

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