Question.3021 - 1. ABC Corp. owns a piece of land and building a few miles from its headquarters. The land originally cost ABC $500,000 to purchase. ABC is considering using the facility for a new training program. It could also rent a building about the same distance from its headquarters for $20,000 a year. A developer has offered ABC $2.5 million for its property. What factors should ABC consider when deciding whether or not to use its own facility or to sell it and rent the other building? What would you recommend?
Answer Below:
$ 500,000 spend to purchase the land is to be considered as sunk cost as a result, this should be ignored in the decision making process. Factors which ABC should consider: - ABC should consider the maintenance cost associated with using the building as a training facility? If the cost associated with this is high, then ABC should sell it and rent a training site instead - Another factor to be considered is the interest rate. If interest rate is really high, ABC should sell the building for $2.5 million and invest that money As per my recommendation, ABC should sell the building and get $2.5 million cash. To generate an income of $20,000 per annum, the return comes to be less than 1% on $2.5 million of cash. And generally, fund managers generate a return of 4-9% per year. As a result, investing the money would be a far better option instead of collecting rent. However, the price of real estate shall increase as well if invested and that would generate a handsome long term return. But one needs to evaluate the current scenario of real estate and the expected returns from it for 5-10 years down the line. Output TC FC VC ATC AFC AVC MC - 125.00 125.00 - 10.00 175.00 125.00 50.00 17.50 12.50 5.00 5.00 20.00 210.00 125.00 85.00 10.50 6.25 4.25 3.50 30.00 235.00 125.00 110.00 7.83 4.17 3.67 2.50 40.00 255.00 125.00 130.00 6.38 3.13 3.25 2.00 50.00 275.00 125.00 150.00 5.50 2.50 3.00 2.00 60.00 305.00 125.00 180.00 5.08 2.08 3.00 3.00 70.00 350.00 125.00 225.00 5.00 1.79 3.21 4.50 80.00 420.00 125.00 295.00 5.25 1.56 3.69 7.00More Articles From Economics
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