Question

Problem 6-9 James Kirk is a financial executive with Flint 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 (5463,000 sales) to a large operation ($41,670,000 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 Mire 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 Click here to view factor tables In 2016, Flint 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, 2017, Flint took possession of the leased property. The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental payments of $730,000 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 $395,000 are due on January 1 for each of the last 10 years of the lease term. Fint 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 $7,329,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest. Compute the present value of lease vs purchase. (Round factor values to 5 decimal places, .g. 1.25124 and final answer to o decimal places, e.g. 458581) Lease Purchase Present value Should the company have purchased rather than leased the facilities? Flint Enterprises should 8 the facilities.

Answer 1

Only first problem has been solved.

The company borrows from bank at 10% interest p.a. Hence, the discount rate which may be used to discount the cash flows is 10%. Year Cash Flows 0-9 10-19 20 $ $ $ 7,30,000 3,95,000 PV factors at Discounted Cash 10% flow 6.75902 $ 49,34,085 2.60590 $ 10,29,331 0.14864 $ Total $ 59,63,416 Lease 59,63,416 Purchase 73,29,000 Present Value $ $ Flint Enterprises should lease the facilty due to lower present value of cash payments.