Problem $14-25($Algo$)$ Net Present Value Analysis of a Lease or Buy Decision $[$LO$14-2]$

The Riteway Ad Agency provides cars for its sales staff. Its 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 and sell them in three years.

Ten cars would be purchased for $$15,000$ each. If this

alternative is chosen, the entire fleet will incur the

following costs:

Annual cost of servicing, taxes, and licensing

Repairs, first year

Repairs, second year

Repairs, third yearAt 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 costing $$50,000$ per year $($the first payment due at the end of Year $1).$ As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $$10,500$ security deposit at the beginning of the lease period, which would be refunded at the end of the lease contract.

Riteway Ad Agency's required rate of return is $19\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

What is the purchase alternative's net present value.

What is the lease alternative's net present value.

Which alternative should the company accept?

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Problem $14-25($Algo$)$ Net Present Value Analysis of a Lease or Buy Decision $[$LO$14-2]$

The Riteway Ad Agency provides cars for its sales staff. Its 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 and sell them in three years.

Ten cars would be purchased for $$15,000$ each. If this

alternative is chosen, the entire fleet will incur the

following costs:

Annual cost of servicing, taxes, and licensing

Repairs, first year

Repairs, second year

Repairs, third yearAt 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 costing $$50,000$ per year $($the first payment due at the end of Year $1).$ As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $$10,500$ security deposit at the beginning of the lease period, which would be refunded at the end of the lease contract.

Riteway Ad Agency's required rate of return is $19\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

What is the purchase alternative's net present value.

What is the lease alternative's net present value.

Which alternative should the company accept?

Problem $14-25($Algo$)$ Net Present Value Analysis of a Lease or Buy Decision $[$LO$14-2]$

The Riteway Ad Agency provides cars for its sales staff. Its 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 and sell them in three years.

Ten cars would be purchased for $$15,000$ each. If this

alternative is chosen, the entire fleet will incur the

following costs:

Annual cost of servicing, taxes, and licensing

Repairs, first year

Repairs, second year

Repairs, third yearAt 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 costing $$50,000$ per year $($the first payment due at the end of Year $1).$ As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $$10,500$ security deposit at the beginning of the lease period, which would be refunded at the end of the lease contract.

Riteway Ad Agency's required rate of return is $19\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

What is the purchase alternative's net present value.

What is the lease alternative's net present value.

Which alternative should the company accept?