Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision (L01) The Riteway Ad Agency provides cars for its sales staff. 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 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. If the new cars are purchased, then the costs incurred by the company will be as follows: ed Purchase cost of a new fleet: 10 cars at $17,000 each Annual cost of servicing, licences, and taxes for the fleet Repairs for the fleet: First year Second year Third year $170,000 $3,000 ok $ 1,500 $ 4,000 $ 6,000 ances 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 $55,000 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 $10,000 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 18% 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? Kipped Complete this question by entering your answers in the tabs below. Book Required 1 Required 2 Required 3 ferences What is the net present value of the cash flows associated with the purchase alternative? (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Enter negative amount with a minus sign. Do not round intermediate calculations and factor. Round the final answers to the nearest whole dollar amount.) Net present value Required: Required 2 > Me Graw 111 Prey 1 of 2 . Mint Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the lease alternative? (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Enter negative amount with a minus sign. Do not round intermediate calculations and PV factor, Round the final answers to the nearest whole dollar amount.) Net present value Prey 1 of 2 !!! Next > 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. Required 1 Required 2 Required 3 Which alternative should the company accept? Lease alternative OPurchase alternative
