Problem:
Below is a real estate exercise that calls for a comparison between buying and leasing a property. I am not a real estate major and I do not understand what I am supposed to do with that $100,000 stated in the beginning. I am looking for help in devising a way that the cash flows can be compared. I have never worked with a lease before and do not know how to devise the cash flows
Acme Corporation needs a new facility with $100,000 in specialized leasehold improvements.
They can buy the property for $10,000,000 with 25% down and a loan at 6%, 25 yrs. The property is expected to appreciate at 5% per year.
They can lease the property for $65,000/mo. For 5 years.
Assume a triple net lease.
You have been retained to advise Acme on how to proceed. Based on cost of funds alone, what is your expert recommendation?