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:

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 $$70,000$ 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 $$15,000$ 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 $20\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

What is the purchase alternative's net present value.

What is the lease alternative's net present value.

Which alternative should the company accept?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 $$18,000$ each. If this alternative is chosen, the entire fleet will incur the following costs:

Annual cost of servicing, taxes, and licensing $ $5,100$

Repairs, first year $ $3,000$

Repairs, second year $ $5,500$

Repairs, third year $ $7,500$

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 $$70,000$ per year $($the first payment due at the end of Year $1).$ As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $$15,000$ 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 $20\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

What is the purchase alternative$$s net present value.

What is the lease alternative$$s net present value.

Which alternative should the company accept?