Appendix One (Construct or lease)Objective: Should WLW lease or construct their own production facilityOption 1: ConstructCosts to incur:Buying land, construct building and getting ready for use$ 360,000Taxes, insurance, and repairs (per year) $ 34,000Intended years of use 20Projected market value in 20 years $ 1,600,000Maximum down payment WLW can make $ 500,000Remainder in four payments of; $ 160,000Revenue opportunityBuilding annex will be leased to a tenant and will generate a lease revenue (per year) for 10 years $60,000Option 2: Lease Intended years of use 20First lease payment due now $ 90,000Rest of the lease payments (years 2-20) $ 90,000Operating costs to be paid by WLWRepairs (annual) $ 9,000Maintenance (annual) $ 26,000Initial one-time deposit, will be returned in year 20$ 40,000Required rate of return 15%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 Appendix One (Construct or lease)Objective: Should WLW lease or construct their own production facilityOption 1: ConstructCosts to incur:Buying land, construct building and getting readyfor useTaxes, insurance, and repairs (per year)Intended years of useProjected market value in 20 yearsMaximum down payment WLW can makeRemainder in four payments of;Revenue opportunityBuilding annex will be leased to a tenant andwill generate a lease revenue (per year) for 10yearsOption 2: LeaseIntended years of useFirst lease payment due nowRest of the lease payments (years 2-20)Operating costs to be paid by WLWRepairs (annual)Maintenance (annual)Initial one-time deposit, will be returned in year20Required rate of return$360,000$ 34,00020$ 1,600,000$ 500,000$ 160,000$60,00020$ 90,000$ 90,000$9,000$ 26,000$ 40,00015%Methodology:The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing orconstruction.Based on the analysis, they will recommend the preferred option (construction or leasing).

NPV stands for net present value which is the difference between the Present value of total cash…

Answered: Appendix One (Construct or lease)…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 5C: Initial Direct Costs Efland Company leases equipment to Orange Company. Efland incurred the...

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Appendix One (Construct or lease)
Objective: Should WLW lease or construct their own production facility
Option 1: Construct
Costs to incur:
Buying land, construct building and getting ready
for use
$ 360,000
Taxes, insurance, and repairs (per year) $ 34,000
Intended years of use 20
Projected market value in 20 years $ 1,600,000
Maximum down payment WLW can make $ 500,000
Remainder in four payments of; $ 160,000
Revenue opportunity
Building annex will be leased to a tenant and
will generate a lease revenue (per year) for 10
years
$60,000
Option 2: Lease
Intended years of use 20
First lease payment due now $ 90,000
Rest of the lease payments (years 2-20) $ 90,000
Operating costs to be paid by WLW
Repairs (annual) $ 9,000
Maintenance (annual) $ 26,000
Initial one-time deposit, will be returned in year
20
$ 40,000
Required rate of return 15%
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