Joyce purchased the building in which their corporate office is housed on 1/1/21 for $4,700,000. They put down $1,500,000 cash and had to borrow the remaining amount at 6% over a 20-year term. At the time of the purchase, they had the option to lease the building. The 20-year lease would begin on 1/1/21, and called for an immediate payment of $100,000 and then payments of $450,000 beginning on 12/31/21 for the first 10 years and payments of $300,000 beginning on 12/31/31 for the remaining 10 years of the lease. La Fleur had the option to purchase the building for $1 at the end of the lease. Did the CFO make the right decision by purchasing the building? Why or why not? Show your work.
Joyce purchased the building in which their corporate office is housed on 1/1/21 for $4,700,000. They put down $1,500,000 cash and had to borrow the remaining amount at 6% over a 20-year term. At the time of the purchase, they had the option to lease the building. The 20-year lease would begin on 1/1/21, and called for an immediate payment of $100,000 and then payments of $450,000 beginning on 12/31/21 for the first 10 years and payments of $300,000 beginning on 12/31/31 for the remaining 10 years of the lease. La Fleur had the option to purchase the building for $1 at the end of the lease. Did the CFO make the right decision by purchasing the building? Why or why not? Show your work.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Joyce purchased the building in which their corporate office is housed on
1/1/21 for $4,700,000. They put down $1,500,000 cash and had to
borrow the remaining amount at 6% over a 20-year term. At the time of
the purchase, they had the option to lease the building. The 20-year lease
would begin on 1/1/21, and called for an immediate payment of
$100,000 and then payments of $450,000 beginning on 12/31/21 for the
first 10 years and payments of $300,000 beginning on 12/31/31 for the
remaining 10 years of the lease. La Fleur had the option to purchase the
building for $1 at the end of the lease. Did the CFO make the right
decision by purchasing the building? Why or why not? Show your work.
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