Problem 6-10 Your answer is partially correct. Try again. Skysong Inc. owns and
ID: 2621284 • Letter: P
Question
Problem 6-10 Your answer is partially correct. Try again. Skysong 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 $1,854,800. An immediate down payment of $417,900 is required, and the remaining $1,436,900 would be paid off over 5 years at $353,000 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 $510,500. As the owner of the property, the company will have the following out-of-pocket expenses each period 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) $41,000 26,900 16,530 $84,430 Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Skysong Inc. if Skysong will lease the completed facility for 11 years. The annual costs for the lease would be $277,440. Skysong would have no responsibility related to the facility over the 11 years. The terms of the lease are that Skysong 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 $92,200 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 fa table Compute the present value of lease vs purchase. (Currently, the cost of funds for Skysong Inc. is 10%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final anwer to 0 decimal places, e.g. 458,581.)Explanation / Answer
Present Value of purchase:
Year
Cash Flow
Net Cash Flow
Present Value Factor @10%
Present Value
0
417,900+26900
444,800
1
444,800
1
353,000+41,000+26,900+16530
437,430
0.90909
397,663
2
353,000+41,000+26,900+16530
437,430
0.82645
361,514
3
353,000+41,000+26,900+16530
437,430
0.75131
328,646
4
353,000+41,000+26,900+16530
437,430
0.68301
298,769
5
353,000+41,000+26,900+16530
437,430
0.62092
271,609
6
41,000+26,900+16530
84,430
0.56447
47,658
7
41,000+26,900+16530
84,430
0.51316
43,326
8
41,000+26,900+16530
84,430
0.46550
39,302
9
41,000+26,900+16530
84,430
0.42409
35,806
10
41,000+26,900+16530
84,430
0.38554
32,551
11
41,000+16530-510,500
(452,970)
0.35049
(158,761)
NPV
2142,883
Hence, Lease is better.
Year
Cash Flow
Net Cash Flow
Present Value Factor @10%
Present Value
0
417,900+26900
444,800
1
444,800
1
353,000+41,000+26,900+16530
437,430
0.90909
397,663
2
353,000+41,000+26,900+16530
437,430
0.82645
361,514
3
353,000+41,000+26,900+16530
437,430
0.75131
328,646
4
353,000+41,000+26,900+16530
437,430
0.68301
298,769
5
353,000+41,000+26,900+16530
437,430
0.62092
271,609
6
41,000+26,900+16530
84,430
0.56447
47,658
7
41,000+26,900+16530
84,430
0.51316
43,326
8
41,000+26,900+16530
84,430
0.46550
39,302
9
41,000+26,900+16530
84,430
0.42409
35,806
10
41,000+26,900+16530
84,430
0.38554
32,551
11
41,000+16530-510,500
(452,970)
0.35049
(158,761)
NPV
2142,883