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Vaughn Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. 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 $1,865,700. An immediate down payment of $415,500 is required, and the remaining $1,450,200 would be paid off over 5 years at $369,000 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $508,900. 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) Present value Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Vaughn Inc. if Vaughn will lease the completed facility for 12 years. The annual costs for the lease would be $292,200. Vaughn would have no responsibility related to the facility over the 12 years. The terms of the lease are that Vaughn would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $95.600 is required when the store is opened. This deposit will be returned at the end of the 12th 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 Vaughn Inc. is 10.00%) (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.) Lease Which of the two approaches should Vaughn Inc. follow? Vaughn Inc. should lease the facilities. $41,500 Purchase 27.130 17,380 $86,010

Vaughn Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. 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 $1,865,700. An immediate down payment of $415,500 is required, and the remaining $1,450,200 would be paid off over 5 years at $369,000 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $508,900. 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) Present value Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Vaughn Inc. if Vaughn will lease the completed facility for 12 years. The annual costs for the lease would be $292,200. Vaughn would have no responsibility related to the facility over the 12 years. The terms of the lease are that Vaughn would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $95.600 is required when the store is opened. This deposit will be returned at the end of the 12th 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 Vaughn Inc. is 10.00%) (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.) Lease Which of the two approaches should Vaughn Inc. follow? Vaughn Inc. should lease the facilities. $41,500 Purchase 27.130 17,380 $86,010

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Current Attempt in Progress Your answer is partially correct. Vaughn Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. 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 $1,865,700. An immediate down payment of $415,500 is required, and the remaining $1,450,200 would be paid off over 5 years at $369,000 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $508,900. 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) Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Vaughn Inc. if Vaughn will lease the completed facility for 12 years. The annual costs for the lease would be $292,200. Vaughn would have no responsibility related to the facility over the 12 years. The terms of the lease are that Vaughn would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $95.600 is required when the store is opened. This deposit will be returned at the end of the 12th 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 Vaughn Inc. is 10.00%) (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g.458,581.) Present value $ Lease Vaughn Inc. should lease Which of the two approaches should Vaughn Inc. follow? $ the facilities. $41,500 27,130 17,380 $86,010 Purchase
Transcribed Image Text:Current Attempt in Progress Your answer is partially correct. Vaughn Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. 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 $1,865,700. An immediate down payment of $415,500 is required, and the remaining $1,450,200 would be paid off over 5 years at $369,000 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $508,900. 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) Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Vaughn Inc. if Vaughn will lease the completed facility for 12 years. The annual costs for the lease would be $292,200. Vaughn would have no responsibility related to the facility over the 12 years. The terms of the lease are that Vaughn would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $95.600 is required when the store is opened. This deposit will be returned at the end of the 12th 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 Vaughn Inc. is 10.00%) (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g.458,581.) Present value $ Lease Vaughn Inc. should lease Which of the two approaches should Vaughn Inc. follow? $ the facilities. $41,500 27,130 17,380 $86,010 Purchase
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