Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO12-2] The Riteway Ad Agency provides cars for its sales staft. 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 fieet 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 $16,000 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 olternotive: The company can lease the cars under a three-year lease contract The lease cost would be $68,000 per year the first payment due at the end of Year 1). As part of this lcase cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $14,000 security deposit at the beginning of the lease period, which would be refunded when the cars were refurned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 18%. Cilck here to view Exhibil 128-1 and Exhibit 12822, 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 altemative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept? 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? Complete this question by entering your answers in the tabs below. What is the net present value of the cash flows associated with the purchase alternative? (Enter negative amount with a minus sign, Round your intermediate calculations and final answer to the nearest whole dollar amount.) 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? Complete this question by entering your answers in the tabs below. What is the net present value of the cash flows associated with the lease alternative? (Enter negative amount with a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.) Required: 1. What is the net present value of the cash flows associated with the purchase altemative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which altemative should the company accept? Complete this question by entering your answers in the tabs below. Which alternative should the company accept? 12B-1 Prever Valae of 51,41 EXIIBIT 12B-2
