question archive Net Present Value Analysis Ola Lease or Buy Decision Best Quality Stors, Inc
Subject:AccountingPrice: Bought3
Net Present Value Analysis Ola Lease or Buy Decision Best Quality Stors, Inc., owns a nationwide chain of supermarkets. The company is poing to opon another store soon, and a suitable building site has been located in attractive and rapidly growing wen. In discussing how the company can acquire the desired building and other facilities needed to open the new store, Tom Walker, the company's vice president in charge of sales, stated, "I know most of our competitors are starting to lease facilities rather than buy, but I just can't ste the economics of it. Our development people tell me that we can buy the building site, put a building on it, and get all the store fixtures we need for just $850,000. They also say that property taxes, once and repairs would run $20,000 a year. When you figure that we plans to keep a site for 18 years, the total cost of $1.210.000 But then when you realize that the property will be worth at least a half million in 18 years, that's a net cost to us of only S710,000. What would it cost to lease the property understand that Beneficial Insurance Company is willing to purchase the building site construct a building and install fixtures to our specifications, and then lease the facility to us for 18 years at an annual lense payment of S120.000," replied April Coleman, the company's executive vice president "That's just my point said Tom "At S120,000 year, it would costs a cool 52,160,000 over the 18 years That's three times what it would cost to buy, and what would we have left at the end? Nothing The bolding would belong to the insurance company "You're werlooking a few things." replied April For one thing the treasure's office says that we could only afford to put $350,000 down if we buy the property, and then we would love to pay the other $500,000 off over four years at $175,000 a year. So there would be some interest involved on the purchase side that you haven't figured in "But that little bit of interest is nothing compared to over 2 million bucks for leasing." said Tom. "Also, if we lewe understand we would have to put up an 58,000 security deposit that we wouldn't get back until the end. And besides that, we would still have to pay all the yearly reprin and maintance costs just like we owned the property No wonder those are companies we so rich if they can swing deals like this "Well, I admit that I don't have the figures sorted out yet replied April "But I do have that operating cost breakdown for the building, which includes $7.500 antally for property anes, 58,000 force, id $4,500 for repair and maintenance. If we leate, Beneficial will handle its own inance costs and of count the owner will be to pay the property put all this together and see iflessing makes were without required rate of rum of 16 The pride was presentation and recommendation in the executive committee meeting tomonow Let's development will the fiesta payment would be due now and the Idee is yes 1-1? Development also said that this store should generate cash flow that's well above the average for our stores hapura avaly to the they will be the