In 2019, Blossom 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, 2020, Blossom took possession of the leased property. The 20-year lease is effective for the period January 1, 2020, through December 31, 2039. Advance rental payments of $830,000 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 $382,000 are due on January 1 for each of the last 10 years of the lease term. Blossom has an option to purchase all the leased facilities for $1 on December 31, 2039. At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $7,232,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest. Calculate the present value of the payments required of Blossom Enterprises under the lease agreement. Steps to be followed include:
1. Calculate the present value of the future cash flows for the advance rental payments of $590,000 for the period from January 1, 2020, through December 31, 2029. Hint: If using factor tables, because the lease payments are due at the beginning of each year, use the PV.2 regular annuity table for nine years and add the first payment of January 1, 2020, in your calculation.
2. Calculate the present value of the future cash flows for the advance rental payments of $296,000 for the 10-year period beginning January 1, 2030. Hint: If using factor tables, as in the first step, use the PV.2 regular annuity table for 10 years for the present value at January 1, 2029.
3. Take the calculation result of step 2 and arrive at the present value of that amount at January 1, 2020, by using nine years in your discount calculation.
4. Add the result of the first and third steps to arrive at the total cost of leasing.