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please help as soon as posible The Wrongway Ad Agency provides cars for its sales staft. In the past, the company has always purchased ifs
please help as soon as posible
The Wrongway Ad Agency provides cars for its sales staft. In the past, the company has always purchased ifs 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 as follows: Purchase Altemative. 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 $26,400 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease Allernative. The company can lease the cars under a three-year lease contract. The lease cost would be $84,000 per year (with 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. Wrongway would be required to make a $30.750 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. Wrongway's required rate of return is 18%. Wrongway's required rate of retum is 18%. Ciick hete to view Exhiblit 10.1 and Eahibit 10.2, to detesmine the appropriate discount factorits) using tables. 1. Use the total cost approach to determine the present value of the cash flows associated with each altemative: Negullve imounts should be indicated with a minus sign. Round discount factont(s) to 3 decimat places. Round other infermedlafe calculations and finat answers to the nearest whole dolfar amounts? 2. Which alternative should the company accept based on the calculations in part (1)? Lease of cars Purchase of fleet EXHIBIT 10-1 Present Value of \$1 P=(1+r)nFn EXMIBIT 10-2 Present Value of an Annuity of $1 Pn=r1[1(1+r)n1] Step by Step Solution
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