Answered Essay: Kingbird Inc, owns and operates a number of hardware stores in the New England region. Recently, the company has

Kingbird 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 $1,864,400. An immediate down payment of $417,200 is required, and the remaining $1,447,200 would be paid off over 5 years at $368,500 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) $41,030

Insurance (to be paid at the beginning of each year) 27,460

Other (primarily maintenance which occurs at the end of each year) 17,540 $86,030

Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Kingbird Inc. if Kingbird will lease the completed facility for 12 years. The annual costs for the lease would be $258,050. Kingbird would have no responsibility related to the facility over the 12 years. The terms of the lease are that Kingbird 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 $98,900 is required when the store is opened. This deposit will be returned at the end of the 12th year, assuming no unusual damage to the building structure or fixtures.

Compute the present value of lease vs purchase. (Currently, the cost of funds for Kingbird Inc. is 10%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Lease Purchase

Present value

Kingbird 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 $1,864,400, An immediate down payment of $417,200 is required, and the remaining $1,447,200 would be paid off over 5 years at $368,500 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) $41,030 27,460 17,S40 $86,030 Insurance (to be paid a: the beginning of each year) other (primarily mantenance 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 Kingbird Inc. if Kingbird wll lease the completed facility for 12 years. The annual costs for the lease would be $258,050, Kingbird would have no responsibility related to the facility over the 12 years. The terms of the lease are that Kingbird would he required to make 12 annual payments (the first payment to be made at the time the store opens and then each fallowing year). In addition, a depasit of $08,900 is required whan the store is opened. This deposit will he raturned at the end of the 12th yaar, assuming no unusual damage to the huilding structure or fixtures Cornpute the present value of lease vs purchase. (Currently, the cost of funds for Kingbird Iic. is 10) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Lease Purchase Present value

Kingbird 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 $1,864,400, An immediate down payment of $417,200 is required, and the remaining $1,447,200 would be paid off over 5 years at $368,500 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) $41,030 27,460 17,S40 $86,030 Insurance (to be paid a: the beginning of each year) other (primarily mantenance 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 Kingbird Inc. if Kingbird wll lease the completed facility for 12 years. The annual costs for the lease would be $258,050, Kingbird would have no responsibility related to the facility over the 12 years. The terms of the lease are that Kingbird would he required to make 12 annual payments (the first payment to be made at the time the store opens and then each fallowing year). In addition, a depasit of $08,900 is required whan the store is opened. This deposit will he raturned at the end of the 12th yaar, assuming no unusual damage to the huilding structure or fixtures Cornpute the present value of lease vs purchase. (Currently, the cost of funds for Kingbird Iic. is 10) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Lease Purchase Present value

Expert Answer

 

Present Value:

Cost of Buying = Down payment + Pv of Annual Installment Payment + PV of Annual property tax & other primary

maintenance payment + PV of Annual Insurance Payment – pv of sale value

Cost of Buying = 417200 + 368500*(1-(1+10%)^-5)/10% + (41030+17540)*(1-(1+10%)^-12)/10% + 27460*(1-

(1+10%)^-12)/10% * (1+10%) – 503100/(1+10%)^12

Cost of Buying = $ 2258694.065

Present Value of :

Cost of Leasing = Initial Deposit + PV of annual lease payment – pv of deposit refund

Cost of Leasing = 98900+ 258050*(1-(1+10%)^-12)/10% * (1+10%) – 98900/(1+10%)^12

Cost of Leasing = $ 2001487.90

Decision : The Company should take the building on lease as its present value of cost is lower than buying

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