Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Sunland Inc
Sunland 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 Sunland Inc. is 10%. Purchase: Lease: 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 $355,000 is required, and the remaining $1,505,000 would be paid off over five years with payments of $361,000 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 $560,000. As the owner of the property, the company will pay $51,000 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 Sunland Inc. if Sunland will lease the completed facility for 12 years. The annual payments would be $253,000. Sunland would have no responsibility related to the facility over the 12 years. The terms of the lease are that Sunland 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 $130,000 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 10% discount rate.
Using factor tables, calculate the present value of the net cash flows required of Sunland Inc. for: (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 5,275.) Click here to view the factor table PRESENT 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 $ e Textbook and Media Assistance Used Your answer is incorrect. Which of the two alternatives should Sunland Inc. adopt? Sunland Inc. should adopt the alternative. Toythook and Modis
Expert Solution
-
Purchase Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Total Down Payment $ 3,55,000 $ 3,55,000 Installment $ 3,61,000 $ 3,61,000 $ 3,61,000 $ 3,61,000 $ 3,61,000 $ 18,05,000 Sale value at the end of life $ -5,60,000 $ -5,60,000 Occupancy Expense $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 6,12,000 Total Outflow $ 3,55,000 $ 4,12,000 $ 4,12,000 $ 4,12,000 $ 4,12,000 $ 4,12,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ 51,000 $ -5,09,000 $ 22,12,000 Discount rate @ 10% 1 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 0.3505 0.3186 7.8137 Net Present value of Outflow $ 3,55,000 $ 3,74,545 $ 3,40,496 $ 3,09,542 $ 2,81,402 $ 2,55,820 $ 28,788 $ 26,171 $ 23,792 $ 21,629 $ 19,663 $ 17,875 $ -1,62,183 $ 18,92,539 Lease Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Total Deposit made $ 1,30,000 Lease payment $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 30,36,000 Deposit refund $ -1,30,000 $ -1,30,000 Total Outflow $ 3,83,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ 2,53,000 $ -1,30,000 $ 30,36,000 Discount rate @ 10% 1 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 0.3505 0.3186 7.8137 Net Present value of Outflow $ 3,83,000 $ 2,30,000 $ 2,09,091 $ 1,90,083 $ 1,72,802 $ 1,57,093 $ 1,42,812 $ 1,29,829 $ 1,18,026 $ 1,07,297 $ 97,542 $ 88,675 $ -41,422 $ 19,84,828 1. Present value of Purchase alternative $ 18,92,539
2. Present value of Lease alternative $ 19,84,828
Sunland Inc should adopt the purchase alternative
Note:- Sunland Inc have lower present value in the case of purchase alternative, therefore they should choose purchase alternative
Comment
Up next for you in Accounting
I need help with this
problem please!
answer in the format
above
See more questions for subjects you study
Questions viewed by other students
Post a question
Answers from our experts for your tough homework questions
Snap a photo from your phone to post a question
We'll send you a one-time download link
Enter your 10 digit phone numberText me
By providing your phone number, you agree to receive a one-time automated text message with a link to get the app. Standard messaging rates may apply.
My Textbook Solutions
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
