Problem 6B-10 x Your answer is incorrect. Try again Bridgeport Inc. owns and ope
ID: 2599803 • Letter: P
Question
Problem 6B-10 x Your answer is incorrect. Try again Bridgeport Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,860,100. An immediate down payment of $412,800 is required, and the remaining $1,447,300 would be paid off over 5 years at $365,700 per year (including interest payments made at end of year). The property is expected to have a useful life of 11 years, and then it will be sold for $507,800. As the owner of the property, the company will have the following out-of-pocket expenses each period $40,370 26,530 17,000 $83,900 Property taxes (to be paid at the end of each year) Insurance (to be paid at the beginning of each year) Other (primarily maintenance which occurs at the end of each year) Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Bridgeport Inc. if Bridgeport will lease the completed facility for 11 years. The annual costs for the lease would be $266,390. Bridgeport would have no responsibility related to the facility over the 11 years. The terms of the lease are that Bridgeport would be required to make 11 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $91,100 is required when the store is opened. This deposit will be returned at the end of the 11th year, assuming no unusual damage to the building structure or fixtures Compute the present value of lease vs purchase. (Currently, the cost of funds for Bridgeport Inc. is 10%.) (Round factor values to 5 decimal places, e.g 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Lease Purchase Present valueExplanation / Answer
Solution:
Computation of Present Value of Purchase and lease Particulars Cash outflows Period PV Factor Present Value A - Purchase: Initial down payment $412,800.00 0 1 $412,800.00 Annual payment of installment at the end of year for 5 years $365,700.00 5 3.79078 $1,386,288.25 Annual payment of property tax at the end of year for 11 years $40,370.00 11 6.49506 $262,205.57 Annual payment of Insurance at the beginning of each year for 11 years $26,530.00 11 7.14456 $189,545.18 Annual payment of Other cost at the end of year for 11 years $17,000.00 11 6.49506 $110,416.02 Salvage value at the end of 11 year -$507,800.00 11 0.35049 -$177,978.82 Present Value of Cash outflow under purchase model $2,183,276.19 B - Lease Option Initial lease deposit $91,100.00 0 1 $91,100.00 Annual lease payment at the beginning of year for 11 years $266,390.00 11 7.14456 $1,903,239.34 Recovery of initial deposit at the end of 11 years -$91,100.00 11 0.35049 -$31,929.64 Present Value of Cash outflow under Lease model $1,962,409.70