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Present Value Analysis Buy Decision The Riteway Ad Agency provides cars for its sales staff. In the past, the company had always purchased its cars
Present Value Analysis Buy Decision The Riteway Ad Agency provides cars for its sales staff. In the past, the company had always purchased its cars from a dealer and then sold the cars after four years of use. The company's present fleet of cars is four years old and will be sold company is considering two alternatives: Purcha se alternati ve: The company can purchase the cars, as in the past, and sell the cars after four years of use. Ten cars will be needed, whi ch ca $19,000 each. If this alternative is accepted, following cost estimates will be incurred on the fleet as a whole (not per vehicle): be purchased at a discounted price of the Annual cost of servicing, taxes, and licensing Repairs, second year Repairs, third year Repairs, four th year (no longer worth repairing) $-0- $4,000 $5,000 $6,000 At the end of four years, the fleet will be sold original purchase price. The company can lease the cars under a four-vear lease contract. vear in the form of an ordinary annuity. As part of this lease agreement, the lessor would provide servicing, repairs, licensing, and pay all the taxes Riteway would be required to make a $10,000 securit deposit at the beginning of the lease period, which would be refunded when the cars were returned to the lessor at the end of the lease contract. alternative: The lease cost would be $50, 000 per For capital budgeting decisions, Riteway Ad Agency employs a 14% discount rate. Required: 1. What is the net present value of the cash flows associated with the purchase alternative? 2. of flows associated with the lease alternative? (CkFig: $149, 765 (+30). I am 79% confident in my check figure; no guarantee offered.) 3. Which alternative should the company accept (buy or lease the autos)? Suppose Riteway management misread the lease contract. In fact, the first payments comes on the day of lease origination. 4. Redo 2 5. Reconsider 3.
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