Steven Halabi is a financial executive with Sheridan Enterprises. Although Steven has not had formal training in finance or accounting, he has a good sense of numbers and has helped the company grow from a tiny company ($550,000 in sales) to a large operation ($50 million in sales). With the business growing steadily, the company needs to make several difficult financial decisions that Steven feels are 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 asked each prospective employee to prepare answers to questions relating to situations he has recently encountered.

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 from January 1, 2023, through December 31, 2042. Advance rental payments of $880,000 are payable to the lessor (owner of facilities) on January 1 of each of the first ten years of the lease term. Advance payments of $440,000 are due on January 1 for the last ten years of the lease term. Sheridan can purchase all the leased facilities for $1 on December 31, 2042. When the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $7.92 million. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest. Should the company have purchased rather than leased the facilities?

1- Calculate the present value of the future cash flows for the advance rental payments of $880,000 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: $

2-Calculate the present value of the future cash flows for the advance rental payments of $440,000 for the ten years beginning January 1, 2033. Hint: If using factor tables, as in the first step, use the present value table for ten years for the current value on January 1, 2032: $

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

4-Add the result of the first and third steps to arrive at the total cost of leasing: $