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.

$($a$)$

Using Excel functions, calculate the present value of the net cash flows required of Sandhill for: $($Round answers to $2$ decimal places,

e$.$g$.5,275\mathrm{.}25.)$

Present Value

The purchase alternative

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