Question - Company Alpha owns and operates a number of hardware stores in the Arizona region. Recently, the company has decided to locate another store in a rapidly growing area of Texas. 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
Total = $83,820
Lease: Credit Union Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Company Alpha. if Company Alpha will lease the completed facility for 11 years. The annual costs for the lease would be $277,580. Company Alpha would have no responsibility related to the facility over the 11 years. The terms of the lease are that Company Alpha 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.
Compute the present value of lease vs purchase. (Currently, the cost of funds for Company Alpha is 9%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Which of the two approaches should Company Alpha follow?
Lease or Purchase ____________ the facilities