Novak Corp. owns and operates a number of outdoor clothing retail stores in the Pacific Northwest....

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Novak Corp. owns and operates a number of outdoor clothing retail stores in the Pacific Northwest. Recently, the company has decided to locate another store in a rapidly growing area of Idaho. 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 $3,655,000. An immediate down payment of $612,000 is required, and the remaining $3,043,000 would be paid off over 5 years at $820,000 per year (including interest; payments made at end of year). The property is expected to have a useful life of 15 years, and then it will be sold for $254,000. 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) Insurance (to be paid at the beginning of each year) Other (primarily maintenance which occurs at the end of each year) $262,000 60,300 28,600 $350,900 Lease: Zero National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Novak Corp. if Novak Corp. will lease the completed facility for 15 years. The annual costs for the lease would be $756,700. Novak Corp. would have no responsibility related to the facility over the 15 years. The terms of the lease are that Novak Corp. would be required to make 15 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $76,000 is required when the store is opened. This deposit will be returned at the end of the fifteenth year, assuming no unusual damage to the building structure or fixtures. Click here to view factor tables Compute the present value of lease vs purchase. (Currently, the cost of funds for Novak Corp. is 9%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 458,581) Purchase Present value $ $ Which of the two approaches should Novak Corp. follow? Novak Corp. should the facilities. Lease Novak Corp. owns and operates a number of outdoor clothing retail stores in the Pacific Northwest. Recently, the company has decided to locate another store in a rapidly growing area of Idaho. 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 $3,655,000. An immediate down payment of $612,000 is required, and the remaining $3,043,000 would be paid off over 5 years at $820,000 per year (including interest; payments made at end of year). The property is expected to have a useful life of 15 years, and then it will be sold for $254,000. 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) Insurance (to be paid at the beginning of each year) Other (primarily maintenance which occurs at the end of each year) $262,000 60,300 28,600 $350,900 Lease: Zero National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Novak Corp. if Novak Corp. will lease the completed facility for 15 years. The annual costs for the lease would be $756,700. Novak Corp. would have no responsibility related to the facility over the 15 years. The terms of the lease are that Novak Corp. would be required to make 15 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $76,000 is required when the store is opened. This deposit will be returned at the end of the fifteenth year, assuming no unusual damage to the building structure or fixtures. Click here to view factor tables Compute the present value of lease vs purchase. (Currently, the cost of funds for Novak Corp. is 9%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 458,581) Purchase Present value $ $ Which of the two approaches should Novak Corp. follow? Novak Corp. should the facilities. Lease

Answer rating: 100% (QA)

Purchase Option Analysis 1 Initial Investment Down Payment 612000 2 Annual Payments for 5 years Amou... View the full answer