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Flounder 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 $$1,860,400.$

An immediate down payment of $$414,200$ is required, and the remaining $$1,446,200$ would be paid off over $5$ years at $$365,200$ per

year $($including interest payments made at end of year$).$ The property is expected to have a useful life of $12$ years, and then it will be

sold for $$503,100.$ 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$)$

$$41,140$

Insurance $($to be paid at the beginning of each year$)$

$26,820$

Other $($primarily maintenance which occurs 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 Flounder Inc.

if Flounder will lease the completed facility for $12$ years. The annual costs for the lease would be $$243,780.$ Flounder would have no

responsibility related to the facility over the $12$ years. The terms of the lease are that Flounder would be required to make $12$ annual

payments $($the first payment to be made at the time the store opens and then each following year$).$ In addition, a deposit of $$99,900$ is

required when the store is opened. This deposit will be returned at the end of the $12$ th 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 Flounder Inc. is $11\mathrm{.}00\%.)($Round factor values to $5$

decimal places, e$.$g$.1\mathrm{.}25124$ and final answers to $0$ decimal places, e$.$g$.458,581.)$

Lease

Present value

Purchase

$

Which of the two approaches should Flounder Inc. follow?

Flounder Inc. should

the facilities.