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Problem 14-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO14-2] The Riteway Ad Agency provides cars for its sales staff.
Problem 14-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO14-2] 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 year $ 5,500 $ 3,400 $ 5,900 $ 7,900 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 costing $74,000 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 $17,000 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 18%. Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables. Required Lease alternative: The company can lease the cars under a three-year lease contract costing $74,000 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 $17,000 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 18%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 3. Which alternative should the company accept? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the purchase alternative's net present value. Note: Enter negative amount with a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount. Net present value 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 $17,000 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 18%. Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 3. Which alternative should the company accept? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the lease alternative's net present value. Note: Enter negative amount with a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount. Net present value Deguised < Prev 4 of 5 Next > Show less A 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 $17,000 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 18%. Click here to view Exhibit 148-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 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? Purchase alternative
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