Dunn Inc. owns and operates a number of hardware stores in the New England regio
ID: 2415757 • Letter: D
Question
Dunn 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 $1,859,800. An immediate down payment of $406,400 is required, and the remaining $1,453,400 would be paid off over 5 years at $361,600 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 $508,300. As the owner of the property, the company will have the following out-of-pocket expenses each period.
$40,730
27,030
16,340
$84,100
Which of the two approaches should Dunn Inc. follow?
$40,730
Insurance (to be paid at the beginning of each year)27,030
Other (primarily maintenance which occurs at the end of each year)16,340
$84,100
Explanation / Answer
Buy a property Cash outflow 1,859,800 Year Yearly payment Property tax other total Present value present value of expenses Insurance Present value of Insurance present value of total expenses 0 down payment 406400 0 27030 1 27030 27030 1 361,600 40730 16340 418,670 0.909091 380609.091 27030 0.9090909 24572.73 405181.82 2 361,600 40730 16340 418,670 0.826446 346008.264 27030 0.8264463 22338.84 368347.11 3 361,600 40730 16340 418,670 0.751315 314552.968 27030 0.7513148 20308.04 334861.01 4 361,600 40730 16340 418,670 0.683013 285957.243 27030 0.6830135 18461.85 304419.1 5 361,600 40730 16340 418,670 0.620921 259961.13 27030 0.6209213 16783.5 276744.63 6 40730 16340 57,070 0.564474 32214.5272 27030 0.5644739 15257.73 47472.258 7 40730 16340 57,070 0.513158 29285.9338 27030 0.5131581 13870.66 43156.598 8 40730 16340 57,070 0.466507 26623.5762 27030 0.4665074 12609.69 39233.271 9 40730 16340 57,070 0.424098 24203.2511 27030 0.4240976 11463.36 35666.61 10 40730 16340 57,070 0.385543 22002.9555 27030 0.3855433 10421.24 32424.191 11 40730 16340 57,070 0.350494 20002.6868 27030 0.3504939 9473.85 29476.537 12 40730 16340 57,070 0.318631 18184.2608 18184.261 12 selling price 508300 0.318631 161960 sum of cash outflow sum of cash outflow 2368597.4 Purchase price Purchase price 1,859,800 difference additional payment to made 508,797 sale proceed received 161,960 present value 346,837 Lease Year 0 107800 107800 0 275400 275400 1 275400 0.909091 250363.6 2 275400 0.826446 227603.3 3 275400 0.751315 206912.1 4 275400 0.683013 188101.9 5 275400 0.620921 171001.7 6 275400 0.564474 155456.1 7 275400 0.513158 141323.7 8 275400 0.466507 128476.1 9 275400 0.424098 116796.5 10 275400 0.385543 106178.6 11 275400 0.350494 96526.02 Present value of total payment 2171940 ptrchase price 1,859,800 excess payment 312,140 additional amount of 107800 34348.4 34348.4 Additional payment 277,791 Lease Purchase Present value -277791 -346837 leasing a machine is a profitable venture note : present value of insurance payment is made of 11 years only because payment is made at the start of the year and sam with lease payments
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