A company has the following alternatives on some real estate that it needs for its new plant. It can lease the facility for $10,000 a month for 15 years, or it can buy the facility now for $800,000. The company’s weighted average cost of capital is 12% and payments are made at the end of each month.

which would be cheaper for the company to buy or lease real estate? show your work.
what non-quantative factors should the management consider when making the decision?

To determine whether it is cheaper for the company to buy or lease the real estate, we need to calculate the present value of both options. The present value is the current value of future cash flows discounted at the company's weighted average cost of capital (WACC).

First, let's calculate the present value of leasing the facility. The lease payment is $10,000 per month for 15 years, and the WACC is 12%.

PV(Lease) = (Payment / (1 + WACC)^time) + (Payment / (1 + WACC)^(time-1)) + ... + (Payment / (1 + WACC))

PV(Lease) = (10,000 / (1 + 0.12)^1) + (10,000 / (1 + 0.12)^2) + ... + (10,000 / (1 + 0.12)^180)

Now, let's calculate the present value of buying the facility. The cost to buy the facility is $800,000.

PV(Buy) = Cost to buy / (1 + WACC)^time

PV(Buy) = 800,000 / (1 + 0.12)^1

Now, compare the present values of both options. If PV(Lease) < PV(Buy), then leasing is cheaper. If PV(Lease) > PV(Buy), then buying is cheaper.

Next, let's discuss the non-quantitative factors that management should consider when making the decision:

1. Flexibility: Leasing provides more flexibility for the company to adapt to changing business needs or locations. Buying the facility may lock the company into a specific location for a long time.

2. Control: Buying the facility gives the company full control over the property and allows customization and modifications as required. Leasing may limit the company's ability to make changes to the property.

3. Long-term plans: Consider the company's long-term plans and growth projections. If the company anticipates significant expansion, buying may be more beneficial as it provides a long-term asset.

4. Tax implications: Evaluate the tax implications of buying versus leasing. Owning real estate may provide tax advantages such as deductions for property taxes and mortgage interest. Leasing costs may be fully deductible as operating expenses.

5. Market conditions: Analyze the real estate market conditions, such as property values and rental rates. If the market is unstable or property values are expected to decline, leasing may be a safer option.

6. Capital availability: Assess the company's financial situation and access to capital. Buying the facility requires a significant upfront investment, whereas leasing requires ongoing monthly payments.

Overall, both quantitative and non-quantitative factors should be considered when making the decision to buy or lease real estate.