The XYZ Company has a choice between two warehouses. A lease at location A costs $1000 per month with a payment of $2000 up front to guarantee the 3 year lease
Location B would cost $1200 per month and would be leased from month to month. The anticipated revenue in either location is $1500 per month. The estimated rate of return is 10% per year. Using net present value, determine which location would be the better choice.
What will be an ideal response?
Answer: Location A
Expected annual profit = 12 × ($1500 - $1000) = $6000
NPV = $6000 + ($6000/1.1) + ($6000/1.12) - $2000 = $14,413.22
Location B
Expected annual profit = 12 × ($1500 - $1200) = $3600
NPV = $3600 + ($3600/1.1) + ($3600/1.12) = $9847.93
Location A is the better choice.
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