Crane Inc. owns and operates a number of hardware stores in theNew England region. Recently, the company has decided to locateanother store in a rapidly growing area of Maryland. The company istrying to decide whether to purchase or lease the building andrelated facilities.
Purchase: The company can purchase the site,construct the building, and purchase all store fixtures. The costwould be $ 1,864,400. An immediate down payment of $ 417,200 isrequired, and the remaining $ 1,447,200 would be paid offover 5 years at $ 368,500 per year (including interestpayments made at end of year). The property is expected to have auseful life of 12 years, and then it will be sold for $503,100. As the owner of the property, the company will have thefollowing out-of-pocket expenses each period.
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| Property taxes (to be paid at theend 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 | | |
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Lease: First National Bank has agreed to purchasethe site, construct the building, and install the appropriatefixtures for Crane Inc. if Crane will lease the completed facilityfor 12 years. The annual costs for the lease would be $258,050. Crane would have no responsibility related to the facilityover the 12 years. The terms of the lease are that Cranewould be required to make 12 annual payments (the firstpayment to be made at the time the store opens and then eachfollowing year). In addition, a deposit of $ 98,900 is requiredwhen the store is opened. This deposit will be returned at the endof the 12th year, assuming no unusual damage to thebuilding structure or fixtures.
Compute the present value of lease vs purchase. (Currently, thecost of funds for Crane Inc. is 10%.)
