A Company Is Planning to Move to a Larger Office

question 17

Multiple Choice

A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased.Cash flows for owning versus leasing are estimated as follows.Assume that the cash flows from operations will remain level over a 10 year holding period.If purchased,the company will invest $385,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in year 10.The after-tax cash flow from sale of the property at the end of year 10 is expected to be $750,000.What is the incremental rate of return on equity to the company,if the property is owned instead of leased?

• A)17.99%
• B)13.26%
• C)10.32%
• D)12.62%

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Definitions:

Quantitative Structure

A framework or model that uses numerical and statistical techniques to analyze or represent a set of data or patterns.

Contingency

An event or condition that is possible but cannot be predicted with certainty, often requiring planning for different potential outcomes.

System

A system is a coherent set of interrelated components that work together to achieve a specific goal or function, often within an organizational or technological context.

Systems Thinking

An analytical approach focused on understanding the interconnections and interactions within complex systems, rather than viewing components in isolation.