Question
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
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 $1,857,100. An immediate down payment of $404,100 is required, and the remaining $1,453,000 would be paid off over 5 years at $356,900 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 $505,800. 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) | $40,990 | |
| Insurance (to be paid at the beginning of each year) | 27,040 | |
| Other (primarily maintenance which occurs at the end of each year) | 17,590 | |
| $85,620 |
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 11 years. The annual costs for the lease would be $292,510. Pina would have no responsibility related to the facility over the 11 years. The terms of the lease are that Pina 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 $91,100 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. Click here to view factor tables Compute the present value of lease vs purchase. (Currently, the cost of funds for Pina Inc. is 10%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Auditing Cases An Interactive Learning Approach
Authors: Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt
5th edition
132567237, 978-0132998345, 132998343, 978-0132567237
