Question

James Kirk is a financial executive with Flounder Enterprises. Although James Kirk has not had any formal training in finance or accounting, he has a “good sense” for numbers and has helped the company grow from a very small company ($470,000 sales) to a large operation ($42,300,000 in sales). With the business growing steadily, however, the company needs to make a number of difficult financial decisions in which James Kirk feels a little “over his head.” He therefore has decided to hire a new employee with “numbers” expertise to help him. As a basis for determining whom to employ, he has decided to ask each prospective employee to prepare answers to questions relating to the following situations he has encountered recently. Here are the questions.

In 2019, Flounder Enterprises negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were constructed on land owned by the company. On January 1, 2020, Flounder took possession of the leased property. The 20-year lease is effective for the period January 1, 2020, through December 31, 2036. Advance rental payments of $825,000 are payable to the lessor (owner of facilities) on January 1 of each of the first 10 years of the lease term. Advance payments of $399,000 are due on January 1 for each of the last 10 years of the lease term. Flounder has an option to purchase all the leased facilities for $1 on December 31, 2036. At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $7,232,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 9% interest.

Compute the present value of lease vs purchase.

		Lease		Purchase
Present value		$		$

Last year the company exchanged a piece of land for a non-interest-bearing note. The note is to be paid at the rate of $14,300 per year for 9 years, beginning one year from the date of disposal of the land. An appropriate rate of interest for the note was 12%. At the time the land was originally purchased, it cost $96,500.

The fair value of the note

$

Answer 1

a)
Present Value of for the first ten payments:
Present value = $825000 x PVAD(9%,10)	$5,771,078.69
Present Value of for the Last ten payments:
Present value = $$399,000 x (PVOA 9%, 19) - (PVOA (9%,9)	$1,178,992.29
Present value of  leasing the facilities	$6,950,070.97
Present value of purchase	$ 7,232,000.00
Net Advantage Leasing	$    281,929.03
The present value of the cost for leasing the facilities, $6,950,071 is less than the cost for purchasing the facilities, $7,232,000, Flounder Enterprises should lease the facilities.
b)
Fair Value of Notes = $14300 x PVOA(12%,9)	$76,193.97