[CUSTOM SOLUTION] Property Purchase Option

As a Unity Holdings Plc junior manager, you have been asked for your annotated calculations and recommendation regarding a decision whether to lease or buy new premises.The option to buyThe costs of buying include £1,950,000 for the freehold land, building costs of £2,612,500, and £268,100 for fittings and equipment. At the end of the fifth year the property is expected to be worth £4m.The option to leasThe building to be leased requires refurbishment that will cost £500,000 and fixtures and fittings will cost £283,000. The terms of the 5 year lease are £50,000 per month.Comply with company policiesAny decision should be based on the results of calculating Net Present Value (NPV) of 5 years of cash flows using a cost of capital of 10%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a significant cushion in case of increases in inflation or interest rates that the directors are concerned are unpredictable.The cash flowsBoth options will use the same cash flows. Year 1 sales revenue is expected to be £7,150,000; the cost of core products are £2,370,000; ancillary stock purchases £1,250,860; staff costs £1,138,020; light & heat £368,720; other overheads £604,240. The cash flows for years 2 to 5 are the same, but are expected to increase by 2% inflation each year.Requirements for Question 3Using the information above and in accord with the above stated company policy you are required to calculate the following for both options:i. Net Present Value (NPV)Property lease option 5 marksProperty purchase option 5 marksii. Payback period (PBP) and Discounted Payback Period (DPBP) 8 marksiii. Internal Rate of Return 2 marksiv. Based on your calculations for each of the above state which option you recommend? 5 marksv. Critically discuss the limitations of the above project appraisal techniques. 5 marks

 

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