Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision (L012-2) The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and ther 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 $ 4,800 Repairs, first year $ 2,700 Repairs, second year $ 5,200 Repairs, third year $ 7,200 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 $67,000 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 $13,500 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 17% ISH Annual cost of servicing, taxes, and licensing $ 4,888 Repairs, first year $ 2,700 Repairs, second year $ 5,200 Repairs, third year $ 7,200 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 $67,000 per first payment clue at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license th- and pay all the taxes Riteway would be required to make a $13,500 security deposit at the beginning of the lease period, wh 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 17% Click here to view Exhibit 128-1 and Exhibit 128-2, 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? Exercise 12-5 (Algo) Preference Ranking (L012-5) Information on four investment proposals is given below. Investment required Present value of cash inflows Net present value Life of the project $ (290,880) 421,200 $ 131,200 5 years Investment Proposal B $ (140,000) $ (60,000) 196,500 94,300 $ 56,500 $ 34,300 7 years 6 years D $ (1,300,000) 1,734,600 $ 434,680 6 years Required: 1. Compute the profitability index for each investment proposal (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference. Investment Profitability Proposal Index Rank Preference A 00 B c. Exercise 12-6 (Algo) Simple Rate of Return Method (L012-6) The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $62,000. The machine would replace an old plece of equipment that costs $16,000 per year to operate. The new machine would cost $7,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $23,000. The new machine would have a useful life of 10 years with no salvage value Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3 What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of reim? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) 5 1 Depreciation exponso 2. Incremental net operating incomo 3. Initial investment 4. Simple rate of return