2:47 Problem 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 $15,000 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 $3,100 $1,000 $3,500 $5,500 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 $50,000 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. Biteway 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 19%. Click here to view Exhibit 14B-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables. EXHIBIT 148-1 Present Value of $1;1(1+r)n Periods 4% 5% 6% 7% 1 0.962 0.952 0.943 0.935 2 0.925 0.907 0.890 0.873 8% 0.926 0.917 0.857 0.842 9% 3 0.889 0.864 0.840 0.816 0.794 0.772 4 0.855 0.823 0.792 | 0.763 0.735 0.708 5 0.822 0.784 0.747 0.713 6 7 8 9 10 11 0.650 0.585 12 0.625 0.557 13 14 15 16 17 0513 0436 0.371 0317 0.270 18 19 20 21 22 23 24 25 26 27 28 29 30 40 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.540 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 0.512 0.683 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 0410 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0476 0456 0.437 0419 0.402 0.386 0.370 0.355 0.341 0.328 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.262 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0434 0.404 0.376 0.351 0327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0.191 0.179 0.168 0.703 0.645 0.392 0.544 0.300 0.460 0.424 0.391 0361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180 0.167 0.155 0.144 0.134 0.576 0.614 0.558 0.508 0.463 0422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.149 0.137 0.126 0.116 0.107 0527 0475 0429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.123 0.112 0.103 0.094 0.086 0.497 0444 0397 0.356 0319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.102 0.092 0.083 0.076 0.069 0.5601 0.530 0.469 0415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.084 0.075 0.068 0.061 0.055 0.577 0.505 0442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044 0.555 0481 0417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 | 0.123 | 0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035 0.534 0458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.036 0.032 0.028 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023 0494 0416 0.350 0.296 0.250 0212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.014 0456 0.377 0312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0051 0.043 0.037 0.031 0026 0.022 0.019 0.016 0.014 0.012 0439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.007 0406 0.326 0262 0.211 0.170 0.138 0.112 0091 0074 0050 0.049 0.040 0.033 0.027 0022 0018 0015 0012 0.010 0.009 0.007 0.006 0.390 0310 0247 0.197 0.158 0.126 0.102 0052 0066 0053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005 0.375 0295 0233 0.184 0.146 0116 0.092 0.074 0.059 0.047 0.038 0.00 0.024 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004 0.361 0.281 0220 0.172 0.135 0.106 0.084 0.066 0053 0.042 0033 0026 0021 0017 0014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.333 0.235 0.196 0.150 0.116 0090 0009 0.054 0.042 0.033 0.321 0243 0.185 0.141 0.107 0082 0063 0048 0.037 0029 0022 0017 0014 0.011 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002 0.308 0231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.003 0.003 0.002 0.029 0.023 0015 0.026 0020 0016 0014 0.011 0012 | 0.010 0.009 0.008 0.007 0.006 0.005 0.004 0.003 0.002 0.006 0.005 0.004 0.003 0.002 0.002 0.208 0.142 0.097 0.067 0.046 0032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.002 0001 EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears; 1r[1-1(1+r)n) 8% 9% 5328 18% 22% 23% 24% 25% 0.813 0.806 0.800 7% 10% 11% 12% 13% 14% 15% 16% 17 % 19% 20% 21% 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.362 0.855 0.847 0.840 | 0.833 | 0.826 0.820 1886 1.859 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1585 1.566 1547 1528 1509 1492 1474 1457 1440 2.775 2.723 2.673 2.624 2.577 2.531 2487 2444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 2074 2.042 2011 1981 1952 3.630 3.346 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362 4452 4329 4212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 5.242 5076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3498 3410 3.326 3.245 3.167 3.092 3.020 2.951 6.002 5.786 5.582 5.389 5.206 | 5.033 4.868 4.712 4.564 4423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3508 3.416 3327 3.242 3.161 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329 6.802 6.515 6.247 5.995 5.759 5.537 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3566 3463 7.360 7024 6.710 6418 6.145 5.889 5.650 5426 5.216 5019 4.833 4.659 4.494 4.339 4.192 4.054 3923 3.799 3.682 3.571 7887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 | 4.327 | 4.177 4.035 3.902 3.776 3.656 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5918 5.660 5.421 5.197 4.988 4.793 4.611 4439 4.278 4.127 3.985 3851 3.725 9.986 9.394 8.853 8.358 7.904 7487 7.103 6.750 6424 6.122 5842 5.583 5342 5.118 4.910 4.715 4.533 4.362 4.203 4.053 3912 3.780 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 9.108 8559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859 8.851 8.313 7824 7.379 6974 6604 6265 5.954 5.668 5405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3887 12.166 11.274 10.477 9.763 9.122 8544 8022 7549 7.120 6.729 6373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4059 3910 12.659 11 690 10.828 10 059 9.372 8.756 8.201 7.702 7250 6.840 6.467 6.128 5818 5534 5.273 5033 4812 4.608 4.419 4.243 4.080 3.928 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7339 7.366 6.938 6.550 6.198 5877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4097 3.942 13.390 12.462 11 70 10.394 9.818 9.129 8.514 7.963 7469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4870 4.657 4.460 4.279 4.110 3.954 14.029 12.821 11.764 10.836 10.017 9.292 8649 8.075 7.562 7.102 6.687 6312 5.973 5.665 5.384 5.127 4.891 4,675 4476 4.292 4.121 3.963 14.451 13.163 12.042 11.061 10.201 9442 8.772 8.176 7.645 7.170 6.743 6.359 6011 5.606 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6399 6044 5.723 5.432 5.167 4.925 4.703 4499 4311 4.137 3976 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7,784 7.283 6835 6434 6073 5.746 5.451 5.182 4937 4.713 4.507 4318 4.143 3981 15.622 14.094 12.783 11654 10.675 9.823 9077 8.422 7843 7330 6.873 6.464 6.097 5.766 5.467 5.195 4.945 4.721 4514 4.323 4.147 3.985 15.983 14.375 13.003 11.826 10.810 9929 9.161 8.488 7896 7.372 6.906 6.118 5.783 5480 5.206) 4.956 4,728 4.320 4.328 4.151 3.988 16.330 14.643 13.211 11.987 10.935 10027 9.237 8.548 7.943 7409 6.935 6514 6.136 5.798 5.492 5.215 4.964 4.734 4524 4332 4.154 3990 6.152 5810 5.502 5.223 4.970 4.739 4528 4.335 4.157. 3.992 16584 15.141 13.591 12.278 11.158 10.198 9370 8.650 8.022 7470 6983 6351 6.166 5820 5510 5.229 4.975 4.743 4.331 4337 4.159 3994 17.292 15.372 13.365 12.409 11.258 10.274 9427 8.694 8055 7496 7.003 6.566 6.177 5829 5517 5.215 4979 4.746 4534 4.339 4.160 3.995 244 7614 7.105 6.642 6233 5.871 5.548 5.258 4.997 4.760 4544 4347 4.166 3.999 Periods 4% 1 5% 6% 0.962 0.952 0.943 2 1.833 3 4 5 6 7 8 9 7.435 7.108 10 8.111 7.722 11 8.760 8.306 12 9.385 8.863 13 14 10.563 9.899 9.295 15 11.118 10.380 9.712 16 11.652 10.838 10.106 9447 17 18 19 20 21 22 23 24 25 26 27 28 16.663 14.898 13.406 12.137 11051 10.116 9.307602 7.984 7441 6.961 6.534 29 30 40 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 6.491 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? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the purchase alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value $ 118,728 Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the lease alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value $ 11,396