Question

Waterway 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 $1,861,400. An immediate down payment of $406,400 is required, and the remaining $1,455,000 would be paid off over 5 years at $354,200 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 $508,400. 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) $41,860 Insurance (to be paid at the beginning of each year) 26,960 Other (primarily maintenance which occurs at the end of each year) 17,170 $85,990 Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Waterway Inc. if Waterway will lease the completed facility for 12 years. The annual costs for the lease would be $266,320. Waterway would have no responsibility related to the facility over the 12 years. The terms of the lease are that Waterway 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 $104,900 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. Click here to view factor tables Compute the present value of lease vs purchase. (Currently, the cost of funds for Waterway Inc. is 11%.)

Answer 1

Year	0	1	2	3	4	5	6	7	8	9	10	11	12
Purchase Price	406400	354200	3542000	354200	354200	35420000
Insurance	26960	26960	26960	26960	26960	26960	26960	26960	26960	26960	26960	26960
Property tax		41860	41860	41860	41860	41860	41860	41860	41860	41860	41860	41860	41860
Others		17170	17170	17170	17170	17170	17170	17170	17170	17170	17170	17170	17170
Salvage value													-508400
Net cash outflow	433360	440190	440190	440190	440190	440190	85990	85990	85990	85990	85990	85990	-449370
PV Factor	1	.901	.812	.731	..659	.593	.535	.782	.434	.391	.352	.317	.286
PV	433360	396611.2	357434.3	321778.9	290085.2	261032.7	46004.65	41447.18	37319.66	33622.09	30268.48	27258.83	-128520

Present Value Purchase option= 2147703

Leasing Option

Annual Lease rental = 266320

PVAF 12% for 11 Years= 6.207

PV of Lease rental = 266320+ 6.207x266320 = 1919368

Add: Deposit required at Year0= 104900

Less: Value of deposit returned in Year 12 = 104900x.286 = 30000

Present vale of lease option = 1994267