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: 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 $20,000 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 Repairs, first year Repairs, second year Repairs, third year $ 5,300 $ 3,200 $ 5,700 $ 7,700 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 $72,000 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 $16,000 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 16%. Click here to view Exhibit 12B-1 and Exhibit 12B-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? EXHIBIT 12B-1 Present Value of $1; (1+r)" Periods 4% 5% 6% 7% 8% 1 0.962 0.952 0.943 0.935 0.926 2 0.925 0.907 0.890 0.873 0.857 3 0.889 0.864 0.840 0.816 0.794 0.772 4 0.855 0.823 0.792 0.763 0.735 0.708 5 0.822 0.784 0.747 0.713 0.681 6 0.790 7 0.760 8 0.731 0.677 0.627 0.746 0.705 0.666 0.630 0.711 0.665 0.623 0.583 0.582 0.540 9 0.703 0.645 0.592 0.544 0.500 10 0.676 0.614 0.558 0.508 0.463 0.422 11 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.577 0.505 0.442 15 0.555 0.481 16 0.534 0.458 17 0.513 0.436 18 0.494 0.416 19 0.475 0.396 0.388 0.340 0.299 0.263 0.417 0.362 0.315 0.394 0.339 0.292 0.252 0.218 0.371 0.317 0.270 0.231 0.350 0.296 0.250 0.212 0.331 0.277 0.232 0.194 0.232 0.275 0.239 0.209 0.188 0.198 0.170 0.180 0.153 0.164 0.138 20 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 21 0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 22 0.422 23 0.406 24 0.390 25 0.375 26 0.361 27 28 29 30 40 0.097 0.067 0.046 0.032 0.022 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.160 0.141 0.125 0.111 0.099 0.140 0.123 0.108 0.095 0.084 0.107 0.093 0.081 0.071 0.093 0.080 0.069 0.060 0.111 0.095 0.081 0.069 0.059 0.051 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.087 0.073 0.061 0.051 0.043 0.037 0.077 0.064 0.053 0.044 0.037 0.031 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.068 0.056 0.046 0.038 0.032 0.026 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.208 0.142 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.205 0.181 0.183 0.160 0.163 0.141 0.123 0.146 0.125 0.108 0.130 0.104 0.093 0.083 EXHIBIT 12B-2 Present Value of an Annuity of $1 in Arrears; 1/r(1-(1/(1+r)^n)) 1 Periods 4% 0.962 5% 6% 7% 0.952 0.943 0.935 2 1.886 1.859 1.833 1.808 3 2.775 2.723 2.673 2.624 4 3.630 3.546 3.465 3.387 5 4.452 4.329 4.212 4.100 6 5.242 7 6.002 8 6.733 9 7.435 7.108 5.076 4.917 4.767 5.786 5.582 5.389 6.463 6.210 5.971 6.802 6.515 10 8.111 7.722 11 8.760 8.306 7.887 7.360 7.024 7.499 12 9.385 8.863 8.384 7.943 7.536 7.161 13 9.986 9.394 8.853 8.358 7.904 7.487 14 10.563 9.899 9.295 8.745 8.244 7.786 15 11.118 10.380 9.712 9.108 8.559 8.061 16 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 12.659 11.690 10.828 10.059 9.372 8.756 19 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 13.590 12.462 11.470 10.594 9.818 21 14.029 12.821 11.764 10.836 10.017 22 23 8.514 9.292 8.649 14.451 13.163 12.042 11.061 10.201 9.442 8.772 14.857 13.489 12.303 11.272 10.371 9.580 9.129 8.883 24 26 27 15.247 13.799 12.550 11.469 10.529 9.707 25 15.622 14.094 12.783 11.654 10.675 9.823 15.983 14.375 13.003 11.826 10.810 9.929 16.330 14.643 13.211 11.987 10.935 10.027 8.985 9.077 9.161 9.237 28 29 16.663 14.898 13.406 12.137 11.051 10.116 9.307 16.984 15.141 13.591 12.278 | 11.158 10.198 9.370 8.602 8.650 30 40 17.292 15.372 13.765 12.409 11.258 10.274 9.427 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.694 8.951 8.244 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 8.176 7.645 7.170 6.743 6.359 8.266 7.718 7.230 6.792 6.399 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 7.984 7.441 6.961 6.534 6.152 5.810 5.502 8.022 7.470 6.983 6.551 6.166 5.820 5.510 8.055 7.496 7.003 6.566 6.177 5.829 5.517 7.634 7.105 6.642 6.233 5.871 5.548 5.029 4.836 4.656 6.011 5.696 5.410 6.044 5.723 5.432