14-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO14-2] The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company's present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $26,000 each. If this alternative. is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing Repairs, first year Repairs, second year $ 4,200 $ 2,100 $ 4,600 $ 6,600 Repairs, third year At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $61,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes.. Riteway would be required to make a $10,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 20%. Click here to view Exhibit 14B-1 and Exhibit 14B-2. to determine the appropriate discount factor(s) using tables. Required: 1. What is the net present value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept? EXHIBIT 1485-1 Present Value of $1. 1(1+rin Periods 5% 4% 6% 7% 8% 9% 10% 11% 12% 13% 0.962 0.952) 0.943 0.926 2 0.925 0.907 0.890 3 0.889 0.864 0.840 4 D855 0823 0.792 $ 0822 0784 0.747 6 2 9 10 12 13 0601 14 0.577 15 16 17 0.108 18 0.095 19 20 21 0439 0.359 0.294 0242 0.199 0.091 22 0422 0342 0.278 0.301 0083 23 0406 0.326 0.262 0.0060 24 25 26 27 28 29 0.321 0.243 0.185 0.141 30 0308 0231 0.174 0.131 40. 0.208 0.142 0.097 0.067 23% 24% 22% 25% 14% 0.120 0813 0.806 0.800 0.935 0.826 0917 0.893 0.909 0.901 885 0.877 0.706 0812 0.797 0.783 0.769 0683 0.672 0661 0.650 0.640 0.873 0.857 0.842 0.826 0.816 0,794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 512 0.683 0.763 0.735 0.708 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.467 0451 0437 0423 0.410 6328 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0476 0.456 0437 0419 0402 0.316 0370 0355 0.341 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.489 0.456 0.432 0410 0.390 0.370 0.152 0.335 0.319 0303 0289 275 0262 0.452 0.425 0347 0.513 0482 0.400 0.376 0.354 0333 0.314 0.296 0.229 0.263 0.249 0235 0.222 0210 0760 0711 0.665 0.625 0.583 0.218 0.204 | 0.191 179 0168 0.376 0.351 0327 0305 0.285 0.266 0.249 0.233 0731 0.677 0.627 0.582 0.540 0.502 0.467 0434 0.404 0.180 0.167 0.155 0.144 0134 0424 0391 0.361 0.313 0.308 0284 0263 0.243 0.225 0.209 0.194 0.703 0592 0.544 0.500 6460 9.645 0.422 6.676 0.614 0.558 0.50 0.453- 0386 0.352 0322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.149 0.137 0126 0116 0.107 0.429 0188 0.350 0.317 0.287 0.261 0650 0.585 0.527 0475 0.217 0215 0.195 0178 0.162 0.148 0.135 0.123 0.112 0.103 004 0086 0208 0187 0.168 0.152 0.137 0124 0112 0.102 0.002 0.625 0.557 0.497 0444 0397 0.356 0319 0.286 0.257 0.231 0.064 0.075 0.145 0.130 0116 0.104 0093 0.368 0.530 0.469 0415 0326 0.290 0.258 0.229 0.204 0.182 0163 0.069 0062 0.263 0.232 0.205 181 0160 0141 0125 0111 0.099 0.08K 0.078 0.505 0.442 0.388 0.340 0299 0057 0.051 6095 0.084 0.074 0.065 0239 0.209 0.18) 0.160 0140 0.123 0.108 0555 0481 0.417 0362 0.315 0.275 0.071 0,062 0.054 0.047 0.042 0.339 0.394 0.534 0458 0292 0252 0218 0.188 0.163 0.14 0.123 0107 093 0.081 0.060 0.052 0045 0019 0034 0.024 0.021 0044 0.038 0513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.093 0.080 0.069 0.032 0.028 0081 0.069 0.059 0.051 0.250 0212 0.180 0.155 0.130 0.111 0494 0.416 0.350 0.296 0020 0.017 0.014 0.037 0.011 0.027 0.023 0083 10.043) 0.070 0.060 0051 0475 0.396 0.331 0.277 0.232 0194 0.164 0138 0.116 0.098 0.037 0.031 0.026 0.022 0.019 0016 0014 0.012 0.067 0.073 0.061 0.055 0.043 0.011 0.009 0.456 0.377 0.312 0.258 0215 0.178 0.149 0.124 0.104 0.031 0.026 0.022 0.018 0.015 0013 0.077 0.064 6.053 0044 0.037 0.364 0.135 0.112 0.011 10.009 0.007 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.226 0.184 0.150 0.12 0.018 0015 0012 00101 0.033 0027 0022 0.049 0.040 0.091 0.04 0170 0138 0.112 0.211 0015 0010 000s 0015 0.082 0.066 0.053 0043 0.035 0.028 0023 0019 0.005 0.010 0.007 0.197 0158 0126 0.102 0.009 0.390 0310 0.247 0047 0038 0.030 0.024 0.020 0.016 0.013 0.005 0.004 0.003 0.009 0.007 0.006 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 6033 026 0.021 0.017 0.014 0.011 6.007 0.006 0005 6004 6.003 0.002 0.361 0.281 0.220 0.172 135 0.106 0.084 0.066 0.053 0.042 0.014 0.011 0.009 0.017 0029 0.023 0.018 0.006 0005 0004 0.003 0.002 0.002 0.347 0.265 0207 0.161 0125 0.09 0.076 0.060 0.047 0.054 0.012 0.013 0.026 0.020 0.016 0.012 0.010 0.008 0.006 0005 0.002 0.002 0.004 0001 0002 0.333 0.255 0.196 0.150 0.116 0090 0.069 0.022 0.017 0.014 0.011 0.00x 0.037 0.029 0.048 0.063 0.002 0.002 0003 0.107 0.082 0.005 0.003 0.0075 0.026 0020 0015 0012 0.009 0.007 0.057 0.044 0.013 0.000 .000 .000 0000 0.099 6011 0.008 0.005 0004 0.003 0.002 0.046 0.032 0.022 0.013 16% 175 18% 15% 0.870 0.862 0.855 0.847 0.756 0.743 0.731 0.718 19% 20% 2116 0.840 0.833 0,694 BOK 0.076 0.069 0.06% 0055 0.049 0045 0040 0.035 0.036 0.032 0.028 0061 0055 10.044 0026 0.023 0.018) 0.000 0.007 0.006 6007 0.006 0.005 0.006 0004 0.004 0.001 0.001 0.001 0.00 0.000 EXHIBIT 14B-2 Present Value of an Annuity of 51 in Arrears 11-1(1) 2 3 Periods 496 596 696 796 0.962 0.952 0943 0.935 1886 1859 1833 1.50 2.775 2.723 2673 4 3851 3.725 8% 9% 10% 11%6 12 1396 14% 15% 16% 17% 1896 1976 2016 21% 22% 23% 2496 25% 0926 0917 0909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0840 0.833 0.826 0.820 0.813 0806 0.300 1.783 1.759 1.236 1713 1690 1668 1.647 1.626 1.605 1585 1.566 1347 1528 1.509 1.492 1.474 1.457 1.440 2.624 2.577 2.531 24x7 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2140 2106 2074 2042 2011 1981 1952 3.630 3.546 3.465 3.387 3.312 3240 3,170 3.102 3037 2.974 2.914 2.855 2.798 2.743 2690 2639 2.589 2.540 2494 2.448 2.404 2.362 4452 4.329 4212 4.100 3.993 1890 3.791 3.696 3.605 3517 3.433 3.352 3214 3.199 3.127 3058 2.991 2926 2564 2803 2.745 2.689 5242 5076 4917 4.767 4623 4456 4.355 4231 4.111 3998 3.889 3.284 3.685 3.589 3.495 3410 3.326 3.245 3.167 3.092 3020 2951 6002 5.786 5.582 5.389 5.206 5.033 4868 4712 4564 4423 4288 4160 4039 3922 3812 37063.605 350 3416 3.327 3242 3161 6.733 6463 6.210 5571 5.747 5.535 5.335 5.146 4.968 4799 4.639 4.457 4.344 4.207 4.07 3954 3837 3726 3.619 3518 3.421 3.329 2435 7.108 6802 6515 6.247 5995 5.759 5.537 5.328 5.132 4946 4.772 4407 44514303 4.163 4001 3905 3.766 36733566 3.463 8.111 7.722 7.360 6418 6.145 5389 5650 5426 5216 5019) 4313 4659 4494 4339 4.192 4054 3923 3.799 3.682 3571 7.139 6805 64956207 5.938 5.687 5.453 5.234 5.029 4.836 4656 4.456 4.327 4.177 4.035 3900 3.776 3.656 7536 | 7.16) 6814 6.492 6.194 5918 5.660 5421 5.197 4988 4793 4611 4439 4278 4.127 3965 8358 7.904 7457 7.103 6750 6424 6122 5842 5.583 5.342 5.118 4910 4715 4.533 4362 4.283 4053 1912 3.780 8.745 8.244 7.756 7.367 6982 6628 5229 6302 6.002 5.724 5.448 5.008 4802 4611 442 4265 4.308 3962 3824 3.859 11.118 10.380 9.712 9.108 8.559 061 7606 7.191 6811 6462 6.142 5347 5.575 5.324 5.092 4876 4.675 4.499 4315 4.153 4001 5.162 4938 4730 4536 4357 4.189 4033 338T 313 7824 7.379 6974 6.604 6265 5954 5668 5.405 4059 3910 9.122 544 8.002 7549 7.120 6.729 6373 6047 5749 5475 5222 4990 4.775 4.576 4391 4219 5534 5273 5033 4812 4.606 4419 4243 4.080 3.928 12.659 11.690 10.825 10.059 9372 756 201 2.702 7.250 6540 6467 6.128 SKIN 7.366 6938 6.550 5.877 5584 5316 5070 4843 4635 4442 4263 4097 3.942 1134 12.085 11.158 10.336 9604 8.950 8365 7839 7469 7025 6623 6259 5.929 5.628 5.353 5.101 4870 4.657 4460 4279 | 4110 3.954 13.590 12.462 11.470 10.594 9815 9.129 514 7933 14329 12.821 11.764 10.856 10.017 9292 649 7.562 7.102 6687 6.312 5523 5665 53384 5427 4891 4.675 4416 4292 4.121 3963 5410 5.149 4909 4690 4.455 4302 4130 3970 14.451 13.163 12.042 11.061 10201 9.442 8.7728.176 7645 7170 6.743 6.359 6.011 5.696 4.705 4.499 4311 4.337 3.976 14.857 13.489 12.303 11.272 10.371 9.580 888) 8266 7718 1230 6.792 6399 6044 5.723 5.432 5167 4925 8.348 7.784 7.283 6835 6434 6073 5.746 5451 5.182 4937 4.713 4507 4315 4.343 3981 8.945 15.247 13.799 12.550 11.469 10.529 9.707 6.097 5.766 5.467 5.195 4945 4721 4314 4.323 4147 3985 6873 6464 9.077 8422 7.343 7330 15.622 14.094 12.783 11.654 10675 923 5.783 540 3.206 4956 472 4.520 4.328 7.372 6906 6491 631 151 3988 15.983 14.375 13.003 11.826 10810 9.929 9.161 8.458 7.896 4.524 4332 4154 3.990 7543 7409 6935 6514 6136 5.298 5.492 5215 4964 4734 16.330 14.643 13.211 11.987 10.935 10.027 9.2378548 4157 3992 8.600 7.954 2441 6561 6534 6152 5800 5502 5.223 49704739 4528 4335 16.663 14.898 13:406 12.137 11.051 10.116 9307 16.954 15.141 13.591 12.278 11.158 10.198 9.370 8650 022 7.470 6983 6551 6.166 5320 5.510 5229 4975 4741 4531 4337 4159 3.994 6566 6.177 5329 5517 $235 4.979 4746 4514 4339 4160 1995 17.292 15.372 13.765 12.409 11.258 10.274 9427 8694 80557496 7.003 19.793 17.459 15.046 13.332 11.925 10.757 9.779 8951 244 7634 7.105 6642 6233 5871 5.548 5.258 4.997 4760 4544 4.347 4.166 3.999 6 7 8 9 10 7.004 6710 11 760 306 7887 12 9.385 8863 8384 7.499 7.943 13 9956 9.394 8.853 14 10.563 9899 9.295 15 16 11652 10.838 10.106 9.447 8351 17 12.166 11.274 10.477 9.763 IN 19 20 21 22 23 24 25 26 27 28 29 30 40 8.075 6.195