Sheridan Inc. owns and operates a number of hardware stores in the Atlantic region. Recently, the company has decided to open another store in a rapidly growing area of Nova Scotia. The company is trying to decide whether to purchase or lease the building and related facilities. Currently, the cost of funds for Sheridan Inc. is 12%. Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,860,000. An immediate down payment of $410,000 is required, and the remaining $1,450,000 would be paid off over five years with payments of $350,000 per year (including interest payments made at the end of the year). The property is expected to have a useful life of 12 years, and then it will be sold for $580,000. As the owner of the property, the company will pay $52,000 in occupancy expenses at the end of each year. First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Sheridan Inc. if Sheridan will lease the completed facility for 12 years. The annual payments would be $269,000. Sheridan would have no responsibility related to the facility over the 12 years. The terms of the lease are that Sheridan would be required to make 12 annual payments. (The first payment is to be made at the time the store opens and then one each following year.) In addition, a deposit of $105,000 is required when the store is opened. This deposit will be returned at the end of the twelfth year, assuming there is no unusual damage to the building structure or fixtures. Assume a 12% discount rate. Lease:
Sheridan Inc. owns and operates a number of hardware stores in the Atlantic region. Recently, the company has decided to open another store in a rapidly growing area of Nova Scotia. The company is trying to decide whether to purchase or lease the building and related facilities. Currently, the cost of funds for Sheridan Inc. is 12%. Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,860,000. An immediate down payment of $410,000 is required, and the remaining $1,450,000 would be paid off over five years with payments of $350,000 per year (including interest payments made at the end of the year). The property is expected to have a useful life of 12 years, and then it will be sold for $580,000. As the owner of the property, the company will pay $52,000 in occupancy expenses at the end of each year. First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Sheridan Inc. if Sheridan will lease the completed facility for 12 years. The annual payments would be $269,000. Sheridan would have no responsibility related to the facility over the 12 years. The terms of the lease are that Sheridan would be required to make 12 annual payments. (The first payment is to be made at the time the store opens and then one each following year.) In addition, a deposit of $105,000 is required when the store is opened. This deposit will be returned at the end of the twelfth year, assuming there is no unusual damage to the building structure or fixtures. Assume a 12% discount rate. Lease:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
please get the correct answer for the purchase alternative, thanks
Transcribed Image Text:Current Attempt in Progress
Sheridan Inc. owns and operates a number of hardware stores in the Atlantic region. Recently, the company has decided to open
another store in a rapidly growing area of Nova Scotia. The company is trying to decide whether to purchase or lease the building and
related facilities. Currently, the cost of funds for Sheridan Inc. is 12%.
Purchase:
The company can purchase the site, construct the building, and purchase all store fixtures. The cost would
$1,860,000. An immediate down payment of $410,000 is required, and the remaining $1,450,000 would be paid off
over five years with payments of $350,000 per year (including interest payments made at the end of the year). The
property is expected to have a useful life of 12 years, and then it will be sold for $580,000. As the owner of the
property, the company will pay $52,000 in occupancy expenses at the end of each year.
First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for
Sheridan Inc. if Sheridan will lease the completed facility for 12 years. The annual payments would be $269,000.
Sheridan would have no responsibility related to the facility over the 12 years. The terms of the lease are that
Sheridan would be required to make 12 annual payments. (The first payment is to be made at the time the store
opens and then one each following year.) In addition, a deposit of $105,000 is required when the store is opened. This
Lease:
deposit will be returned at the end of the twelfth year, assuming there is no unusual damage to the building structure
or fixtures. Assume a 12% discount rate.
Transcribed Image Text:Using factor tables, calculate the present value of the net cash flows required of Sheridan Inc. for: (Round present value factor
calculations to 5 decimal places, e.g. 1.25124 and the final answers to O decimal places, e.g. 5,275.)
Click here to view the factor table PREŠENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE.
Present Value
1. The purchase alternative
2. The lease alternative
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Expert Solution
Step 1 Introduction
leasing vs Buying options: Leasing has the potential to be more enticing than purchasing. Because you are not repaying any principal, your monthly payments are generally cheaper. Instead, you'll borrow and return the difference between the car's net worth and the residual, its projected value at the conclusion of the lease plus finance costs. However, we make our judgment based on the present value of outflows.
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