Sandhill Inc. owns and operates a number of hardware stores in the Atlantic region. Recently, the company decided to open another store in a rapidly growing area of Nova Scotia. The company is trying to decide whether to purchase or lease the building and related facilities. Currently, the cost of funds for Sandhill is $12\%.$

Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $$2,000,000.$ An immediate down payment of $$360,000$ is required, and the remaining $$1,640,000$ would be paid off over five years with payments of $$388,000$ per year $($including interest payments made at the end of the year$).$ The property is expected to have a useful life of $12$ years, and then it will be sold for $$500,000.$ As the owner of the property, the company will pay $$54,000$ in occupancy expenses at the end of each year.

Lease:

First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Sandhill if Sandhill will lease the completed facility for $12$ years. The annual payments would be $$328,000.$ Sandhill would have no responsibility related to the facility over the $12$ years. The terms of the lease are that Sandhill would be required to make $12$ annual payments. $($The first payment is to be made at the time the store opens and then one each following year.$)$ In addition, a deposit of $$105,000$ is required when the store is opened. This deposit will be returned at the end of the twelfth year, assuming there is no unusual damage to the building structure or fixtures. Assume a $12\%$ discount rate.

Present Value

The purchase alternative

$

The lease alternative $($Hint: For the annuity due for the lease payments, use type $1.)$ $