Problem:
In 05 X company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were constructed on land owned by the company. On Jan 1, 06 X company took possession of the leased property. The 20-yr lease is effective for the period jan 1/06 through dec 31,2025. Advance rental payments of $800,000 are payable to the lessor (owner of facilities) on Jan 1 of each of the first 10 years of the lease term. Advance payments of $300,000 are due on jan 1 for each of the last 10 years of the lease term. X company has an option to purchase all the leased facilities for $1 on Dec 31st, 2005. At the time the lease was negotiated, the fair market value of the money to purchase the truck terminals and freight storage facilities was approx. $7,200,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest. Should the company have purchased rather than leased the facilities?