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In 2013, McDowell Enterprises 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 January 1, 2014, McDowell took possession of the leased property. The 20-year lease is effective for the period January 1, 2014, through December 31, 2033. Advance rental payments of $816,200 are payable to the lessor (owner of facilities) on January 1 of each of the first 10 years of the lease term. Advance payments of $408,600 are due on January 1 for each of the last 10 years of the lease term. McDowell has an option to purchase all the leased facilities for $1 on December 31, 2033. At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $7,220,800. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest.

a) Compute the present value of the lease

b) Compute the present value of the purchase

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Operation Management, Management Studies

Category:- Operation Management
Reference No.:- M91626271

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