Question

Question 1: 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 $13,700 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 $83,700

What is the fair value of the note ?

Question 2:James Kirk is a financial executive with Kingbird 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 ($534,000 sales) to a large operation ($48,060,000 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, Kingbird 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, Kingbird 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 $859,000 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 $433,000 are due on January 1 for each of the last 10 years of the lease term. Kingbird 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 $7,708,000. 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?

Answer 1

1
	Years	Payment p.a.	PVIF @ 12%	Present value
	1	13,700	0.892857143	12,232
	2	13,700	0.797193878	10,922
	3	13,700	0.711780248	9,751
	4	13,700	0.635518078	8,707
	5	13,700	0.567426856	7,774
	6	13,700	0.506631121	6,941
	7	13,700	0.452349215	6,197
	8	13,700	0.403883228	5,533
	9	13,700	0.360610025	4,940
			Fair value of the note	72,997
2	Lease the facility
	Year	Years	Lease Payments	PVIF @ 10%	Present Value
	Jan-20	0	859,000	1	859,000
	Jan-21	1	859,000	0.909090909	780,909
	Jan-22	2	859,000	0.826446281	709,917
	Jan-23	3	859,000	0.751314801	645,379
	Jan-24	4	859,000	0.683013455	586,709
	Jan-25	5	859,000	0.620921323	533,371
	Jan-26	6	859,000	0.56447393	484,883
	Jan-27	7	859,000	0.513158118	440,803
	Jan-28	8	859,000	0.46650738	400,730
	Jan-29	9	859,000	0.424097618	364,300
	Jan-30	10	433,000	0.385543289	166,940
	Jan-31	11	433,000	0.350493899	151,764
	Jan-32	12	433,000	0.318630818	137,967
	Jan-33	13	433,000	0.28966438	125,425
	Jan-34	14	433,000	0.263331254	114,022
	Jan-35	15	433,000	0.239392049	103,657
	Jan-36	16	433,000	0.217629136	94,233
	Dec-36	17	1	0.197844669	0
				Fair value of the lease	6,700,010
				Fair value of Purchase	7,708,000
				Benefit if the facility is leased	1,007,990
	Therefore leasing the facility and purchasing the same on December 36 would be more beneficial
	in comparison to purchasing it on day 1.