Question

Shamrock 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 $1,865,600. An immediate down payment of $415,900 is required, and the remaining $1,449,700 would be paid off over 5 years at $358,400 per year (including interest payments made at end of year). The property is expected to have a useful life of 11 years, and then it will be sold for $510,500. 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) $40,270 Insurance (to be paid at the beginning of each year) 27,170 Other (primarily maintenance which occurs at the end of each year) 16,380 $83,820 Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Shamrock Inc. if Shamrock will lease the completed facility for 11 years. The annual costs for the lease would be $277,580. Shamrock would have no responsibility related to the facility over the 11 years. The terms of the lease are that Shamrock would be required to make 11 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $109,000 is required when the store is opened. This deposit will be returned at the end of the 11th 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 Shamrock Inc. is 9%.) (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   $ $ Which of the two approaches should Shamrock Inc. follow? Lease Purchase Present value   $ $ Which of the two approaches should Shamrock Inc. follow? Shamrock Inc. should leasepurchase the facilities LINK TO TEXT LINK TO TEXT

Answer 1

Solution:

Computation of Present Value of Purchasing and Leasing option - Shamrock Inc.
Particulars	Period	Amount	PV Factor	Present Value
Purchasing Option:
Down payment	0	$415,900.00	1.00000	$415,900
Annual installment	1-5	$358,400.00	3.88965	$1,394,051
Property taxes	1-11	$40,270.00	6.80519	$274,045
Insurance	0-10	$27,170.00	7.41766	$201,538
Others	1-11	$16,380.00	6.80519	$111,469
Sale Value of building	11	-$510,500.00	0.38753	-$197,834
Present Value of Buying Option (A)				$2,199,168
Leasing Option:
Annual lease payment	0-10	$277,580.00	7.41766	$2,058,994
Security deposit	0	$109,000.00	1.00000	$109,000
Return of Security deposit	11	-$109,000.00	0.38753	-$42,241
Present Value of Leasing Option (B)				$2,125,753

Shamrock Inc. should lease the facilities.