The Delicious Cake Factory owns a building for its operations. Delicious uses only half of the building and is considering two options that have been presented to them. The Candy Store would like to purchase the half of the building that is not being used for $550,000. A 7% commission would have to be paid at the time of purchase. Ice Cream Delight would like to lease the half of the building for the next 5 years at $100,000 each year. Delicious would have to continue paying $9,000 of property taxes each year and $1,000 of yearly insurance on the property, according to the proposed lease agreement.

Question

The Delicious Cake Factory owns a building for its operations. Delicious uses only half of the building and is considering two options that have been presented to them. The Candy Store would like to purchase the half of the building that is not being used for $550,000. A 7% commission would have to be paid at the time of purchase. Ice Cream Delight would like to lease the half of the building for the next 5 years at $100,000 each year. Delicious would have to continue paying $9,000 of property taxes each year and $1,000 of yearly insurance on the property, according to the proposed lease agreement.
Determine the differential income or loss from the lease alternative.

Bot · Answer

The differential income or loss from the lease alternative would be $400,000. This is calculated by subtracting the total cost of the lease (5 years x $100,000 + $9,000 + $1,000 = $600,000) from the total proceeds of the sale (550,000 - 7% commission = $510,500).