Flounder Inc. owns and operates a number of hardware stores inthe New England region. Recently, the company has decided to locateanother store in a rapidly growing area of Maryland. The company istrying to decide whether to purchase or lease the building andrelated facilities.

Purchase: The company can purchase the site, construct thebuilding, and purchase all store fixtures. The cost would be$1,861,400. An immediate down payment of $406,400 is required, andthe remaining $1,455,000 would be paid off over 5 years at $354,200per year (including interest payments made at end of year). Theproperty is expected to have a useful life of 12 years, and then itwill be sold for $508,400. As the owner of the property, thecompany will have the following out-of-pocket expenses eachperiod.

Property taxes (to be paid at the end of each year)   $41,860

Insurance (to be paid at the beginning of each year) 26,960

Other (primarily maintenance which occurs at the end of eachyear) 17,170

   $85,990

Lease: First National Bank has agreed to purchase the site,construct the building, and install the appropriate fixtures forFlounder Inc. if Flounder will lease the completed facility for 12years. The annual costs for the lease would be $266,320. Flounderwould have no responsibility related to the facility over the 12years. The terms of the lease are that Flounder would be requiredto make 12 annual payments (the first payment to be made at thetime the store opens and then each following year). In addition, adeposit of $104,900 is required when the store is opened. Thisdeposit will be returned at the end of the 12th year, assuming nounusual damage to the building structure or fixtures.

Compute the present value of lease vs purchase. (Currently, thecost of funds for Flounder Inc. is 11%.)