Question

Problem 6-10 Pina 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 $1,860,400. An immediate down payment of $411,200 is required, and the remaining $1,449,200 would be paid off over 5 years at $352,200 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $504,200. 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) $41,610 Insurance (to be paid at the beginning of each year) 27,500 Other (primarily maintenance which occurs at the end of each year) 16,100 $85,210 Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Pina Inc. if Pina will lease the completed facility for 12 years. The annual costs for the lease would be $277,930. Pina would have no responsibility related to the facility over the 12 years. The terms of the lease are that Pina would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $109,700 is required when the store is opened. This deposit will be returned at the end of the 12th year, assuming no unusual damage to the building structure or fixtures.

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Purchase or Lease Particulars Calculation Purchase Lease Site, Building & Fixture 411,200 $ Down Payment 352200*5 years 1,761,000 $ $ Installment Annual payment 41610 12 years 27500*12 years (16100+ 85210)*12 years 499,320 $ 330,000 $ 1,215,720 $ $ Property Taxes Insurance Other $ Less Income from Sale after 12 years 504,200 $ $ Lease Payment Total 277930 12 years $ $3,335,160 4,721,440 $3,335, 160 $ Note Time Value or Interest percentage is not given in question. Thus assuming that time value is ignored. Hence returnable deposit is not relevant