Richard Halabi is a financial executive with Sheridan Enterprises. Although Richard 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 $($ $$430,000$ in sales$)$ to a large operation $($ $$39$ million in sales$).$ With the business growing steadily, however, the company needs to make a number of difficult financial decisions in which Richard 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 situations he has encountered recently.

The following are the facts for the first question asked of prospective employees:

In $2022,$ Sheridan Enterprises negotiated and closed a lease contract for newly constructed truck terminals and freight storage facilities. On January $1,2023,$ Sheridan took possession of the leased property. The $20-$year lease is effective for the period January $1,2023,$ through December $31,2042.$ Advance rental payments of $$680,000$ are payable to the lessor $($owner of facilities$)$ on January $1$ of each of the first $10$ years of the lease term. Advance payments of $$344,000$ are due on January $1$ for each of the last $10$ years of the lease term. Sheridan has an option to purchase all the leased facilities for $$1$ on December $31,2042.$ At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $$6\mathrm{.}12$ million. If the company had borrowed the money to purchase the facilities, it would have had to pay $11\%$ interest. Should the company have purchased rather than leased the facilities?

Follow these steps:

Calculate the present value of the future cash flows for the advance rental payments of $$680,000$ for the period from January $1,2023,$ through December $31,2032.$ Hint: If using factor tables, because the lease payments are due at the beginning of each year, use the present value tables for nine years and add the first payment of January $1,2023,$ in your calculation.

Calculate the present value of the future cash flows for the advance rental payments of $$344,000$ for the $10-$year period beginning January $1,2033.$ Hint: If using factor tables, as in the first step, use the present value table for $10$ years for the present value at January $1,2032.$

Take the calculation result of step $2$ and arrive at the present value of that amount at January $1,2023,$ by using nine years in your discount calculation.

Add the result of the first and third steps to arrive at the total cost of leasing.

$

$(\frac{5244630}{\text{\$}})$

$$5244630$