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 companys 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 $28,000 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	$ 4,400
Repairs, first year	$ 2,300
Repairs, second year	$ 4,800
Repairs, third year	$ 6,800

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 $63,000 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 $11,500 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 Agencys required rate of return is 16%.

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 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 14B-1 Present Value of $1;1(1+r) n Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.439 0.422 0.406 0.390 0.375 0.361 0.347 0.333 0.321 0.308 0.208 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.7180.706 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.3140.296 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.436 0.371 0.317 0.270 0.231 0.198 0.1700.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 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 0.018 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 0.015 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 0.0160.013 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 0.011 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 0.0110.009 0.255 0.1960.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.0200.0160.012 0.0100.008 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 0.006 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 0.005 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 20% 21% 22% 23% 0.833 0.826 0.820 0.813 0.694 0.683 0.672 0.661 0.579 0.564 0.551 0.537 0.482 0.467 0.451 0.437 0.402 0.386 0.370 0.355 0.335 0.319 0.303 0.289 0.279 0.263 0.249 0.235 0.233 0.218 0.204 0.191 0.194 0.180 0.167 0.155 0.162 0.149 0.137 0.126 0.135 0.123 0.112 0.103 0.112 0.102 0.092 0.083 0.093 0.084 0.075 0.068 0.078 0.069 0.062 0.055 0.065 0.057 0.051 0.045 0.054 0.047 0.042 0.036 0.045 0.039 0.034 0.030 0.038 0.032 0.028 0.024 0.031 0.027 0.023 0.020 0.026 0.022 0.019 0.016 0.022 0.018 0.015 0.013 0.018 0.015 0.013 0.011 0.015 0.012 0.010 0.009 0.013 0.010 0.008 0.007 0.010 0.009 0.007 0.006 0.009 0.007 0.006 0.005 0.007 0.006 0.005 0.004 0.006 0.005 0.0040.003 0.005 0.004 0.003 0.002 0.004 0.003 0.003 0.002 0.001 0.000 0.000 0.000 24% 25% 0.806 0.800 0.650 0.640 0.524 0.512 0.423 0.410 0.341 0.328 0.275 0.262 0.222 0.210 0.179 0.168 0.144 0.134 0.116 0.107 0.094 0.086 0.076 0.069 0.061 0.055 0.049 0.044 0.040 0.035 0.032 0.028 0.026 0.023 0.021 0.018 0.017 | 0.014 0.014 0.012 0.011 0.009 0.009 0.007 0.007 0.006 0.006 0.005 0.005 0.004 0.004 0.003 0.003 0.002 0.002 0.002 0.002 0.002 0.002 0.001 0.000 0.000 HA EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears; 10[1-1(1+r)n] Periods 1 2 3 H 4 5 6 7 8 9 II H L 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 11.11810.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 12.166 11.274 10.477 | 9.763 9.122 8.544 8.022 7.549 7.120 6.729 12.659 11.690 | 10.828 10.059 9.372 8.756 8.201 7.702 7.250 6.840 13.134 12.085 | 11.15810.336 9.604 8.950 8.365 7.839 7.366 6.938 13.590 | 12.462 | 11.470 | 10.594 | 9.818 9.129 8.514 7.963 7.469 7.025 14.029 12.821 11.764 10.836 10.017] 9.292 8.649 8.075 7.562 7.102 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645 7.170 14.857 | 13.489 | 12.303 | 11.272 10.371 9.580 8.883 8.266 7.7187.230 15.247 | 13.799 | 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 15.983 14.375 13.003 11.826 10.810 | 9.929 9.161 8.488 7.896 7.372 16.330 14.643 13.211 11.987 10.935 10.027 | 9.237 8.548 7.943 7.409 16.663 14.898 13.406 12.137 11.051 | 10.116 | 9.307 8.602 7.984 7.441 16.984 15.141 | 13.591 | 12.278 11.158 10.198 | 9.370 8.650 8.022 7.470 17.292 | 15.372 13.765 12.409 11.258 10.274 | 9.427 8.694 8.055 7.496 19.793 17.159 15.046 13.332 11.925 10.757 | 9.779 8.951 8.244 7.634 14% 15% 16% 0.877 0.870 0.862 1.647 1.626 1.605 2.322 2.283 2.246 2.914 2.855 2.798 3.433 3.352 3.274 3.889 3.784 3.685 4.288 4.160 4.039 4.639 4.487 4.344 4.946 4.772 4.607 5.216 5.019 4.833 5.453 5.234 5.029 5.660 5.421 5.197 5.842 5.583 5.342 6.002 5.724 5.468 6.142 5.847 5.575 6.265 5.954 5.668 6.373 6.047 5.749 6.467 6.128 5.818 6.550 6.198 5.877 6.623 6.259 5.929 6.687 6.312 5.973 6.743 6.359 6.011 6.792 6.399 6.044 6.835 6.434 6.073 6.873 6.464 6.097 6.906 6.491 6.118 6.935 6.514 6.136 6.961 6.534 6.152 6.983 6.551 6.166 7.003 6.566 6.177 7.105 6.642 6.233 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 1.585 1.566 1.547 1.528 1.509 1.492 1.474 1.457 1.440 2.210 2.174 2.140 2.106 2.074 2.042 2.011 1.981 1.952 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362 3.1993.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 4.659 4.494 4.339 4.192 4.054 3.923 3.799 3.682 3.571 4.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656 4.988 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725 5.118 4.910 4.715 4.533 4.362 4.203 4.053 3.912 3.780 5.2295.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 5.324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859 5.405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3.887 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 5.534 5.273 5.033 4.812 4.608 4.419 4.243 4.080 3.928 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 5.628 5.353 5.101 4.870 4.657 4.460 4.279 4.110 3.954 5.665 5.384 5.127 4.891 4.675 4.476 4.292 4.121 3.963 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 5.723 5.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976 5.746 5.451 5.182 4.937 4.713 4.507 4.318 4.143 3.981 5.7665.467 5.195 4.948 4.721 4.514 4.323 4.147 3.985 5.783 5.480 5.206 4.956 4.728 4.520 4.328 4.151 3.988 5.798 5.492 5.215 4.964 4.734 4.524 4.332 4.154 3.990 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 3.992 5.820 5.510 5.229 4.975 4.743 4.531 4.337 4.159 3.994 5.829 5.517 5.235 4.979 4.7464.534 4.339 4.160 3.995 5.8715.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999 1 1.1. T. . JILI I UTTI