A Textile Company Is Considering Opening a Production and Shipping

question 7

Essay

A textile company is considering opening a production and shipping facility in Dallas to keep up with demand for its pillows. The 105,000- square- foot facility, if purchased, will require an initial investment of $255,000 and an annual operating cost of $68,500. It will have a $80,000 salvage value after 8 years. Alternatively, the facility can be leased with annual rent of $51,000 in year 1 and increasing by $1000 per year. If the company's minimum attractive rate of return is 6% per year, compounded quarterly, should the facility be purchased or leased?

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Definitions:

Elasticity of Demand

This indicates the responsiveness of the quantity demanded of a good to a change in its price; it's another way to describe how variation in price affects consumer demand.

Supply of Computers

The total quantity of computers that producers are willing and able to sell at a given price level.

Ratio of Labor Cost

A financial metric that measures the total labor costs in relation to another metric, often used to assess efficiency or productivity.

Least-Costly Combination

An economic principle that describes the mix of factors of production (like labor and capital) that minimizes cost for a certain level of output.