Managerial Accounting Case: Wyndham Stores
BSAD 526 Managerial Accounting
Case 8-35
Introduction
Wyndham Stores operates a regional chain of upscale department stores. They plan to open another store in a prosperous and growing suburban area. The company’s Vice President of Marketing is in favor of buying the new building site and building a new building on the property. The projected cost for the new building is $14 million, according to the vice president of marketing. The problem with the vice president’s proposal is that he does not take into account time value of money.
The Executive Vice President has an argument for the vice president of marketing, stating that Guardian Insurance is willing to purchase the building site, construct the building, and install all fixtures to Wyndham Store’s specifications for $20 million; which results in a $1 million a year lease payment. Wyndham would be required to pay the first lease payment of $1 million immediately.
If the building and building site were purchased by Wyndham Stores, the total of the funds that would be used to purchase the building and the building site would be $6 million upfront, and pay off for the remaining $8 million would spread out over four years. This would be a total of $2 million a year for four years.
Additional costs if the building site was leased from Guardian Insurance would include a $400,000 security deposit that Wyndham would not recoup until the end of the lease. If Wyndham would lease from Guardian, Guardian would handle the insurance costs and pay the property taxes, however, Wyndham would be required to cover the maintenance costs of $50,000 per year.
Net Present Value, Question One
Wyndham Stores should evaluate two options prior to making a decision on the new facility for the upscale department store. The two options are to either lease or purchase the facility. Wyndham Stores has determined that they will keep the site for 20 years. It is important to remember
Case 8-35
Introduction
Wyndham Stores operates a regional chain of upscale department stores. They plan to open another store in a prosperous and growing suburban area. The company’s Vice President of Marketing is in favor of buying the new building site and building a new building on the property. The projected cost for the new building is $14 million, according to the vice president of marketing. The problem with the vice president’s proposal is that he does not take into account time value of money.
The Executive Vice President has an argument for the vice president of marketing, stating that Guardian Insurance is willing to purchase the building site, construct the building, and install all fixtures to Wyndham Store’s specifications for $20 million; which results in a $1 million a year lease payment. Wyndham would be required to pay the first lease payment of $1 million immediately.
If the building and building site were purchased by Wyndham Stores, the total of the funds that would be used to purchase the building and the building site would be $6 million upfront, and pay off for the remaining $8 million would spread out over four years. This would be a total of $2 million a year for four years.
Additional costs if the building site was leased from Guardian Insurance would include a $400,000 security deposit that Wyndham would not recoup until the end of the lease. If Wyndham would lease from Guardian, Guardian would handle the insurance costs and pay the property taxes, however, Wyndham would be required to cover the maintenance costs of $50,000 per year.
Net Present Value, Question One
Wyndham Stores should evaluate two options prior to making a decision on the new facility for the upscale department store. The two options are to either lease or purchase the facility. Wyndham Stores has determined that they will keep the site for 20 years. It is important to remember