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 $17,000 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$3,300

Repairs, first year$1,200

Repairs, second year$3,700

Repairs, third year$5,700

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 $52,000 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 Agency's required rate of return is 17%.

Click here to viewExhibit 12B-1andExhibit 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?

\fEXHIBIT 123-2 Present Value of an Annuity of $1 in Arrears; % [1 Periods 4% 1 0.962 2 1.886 3 2.275 4 3.630 5 4.452 6 5.242 2 6.002 8 6.233 9 7.435 10 8.111 11 8.760 12 9.385 13 9.986 14 10.563 15 11.118 16 11.652 12 12 .166 18 12 .659 19 13.134 20 13.590 21 14.029 22 14.451 23 14.852 24 15.242 25 15.622 26 15.983 22 16.330 28 16.663 29 16.984 30 17.292 b- 0 19.793 5% 0.952 1.859 2.723 3.546 4.329 5.026 5.786 6.463 2.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12 .085 12 .462 12 .821 13.163 13.489 13.299 14.094 14.325 14.643 14.898 15.141 15.372 17.159 6% 0.943 1.833 2.623 3.465 4.212 4.912 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.422 10.828 11.158 11.470 11.764 12 .042 12 .303 12 .550 12 .783 13.003 13.211 13.406 13.591 13.765 1 5 .046 7% 0.935 1.808 2.624 3.382 4.100 4.267 5.389 5.921 6.515 2.024 2.499 2.943 8.358 8.245 9.108 9.442 9.263 10.059 10.336 10.594 10.836 11.061 11.272 11.469 11.654 11.826 11.987 12.137 12.228 12.409 13.332 8% 0.926 1.783 2.572 3.312 3.993 4.623 5.206 5.247 6.247 6.210 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.322 9.604 9.818 10.012 10.201 10.321 10.529 10.625 10.810 10.935 11.051 11.158 11.258 11.925 9% 0.912 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.482 7.786 8.061 8.313 8.544 8.256 8.950 9.129 9 292 9 442 9.580 9.702 9 823 9.929 10 027 10.116 10198 10 274 1 0 .252 10% 0.909 1.736 2.482 3.170 3.791 4.355 4.868 5.335 5.259 6.145 6.495 6.814 7.1 0 3 7.367 7.606 2.824 8.022 8.201 8.365 8.514 8.649 8.222 8.883 8.985 9.027 9.161 9.232 9.302 9.370 9.427 9.729 l (l + r)" 11% 0.901 1.213 2.444 3.102 3.696 4.231 4.212 5.146 5.537 5.889 6.207 6.492 6.250 6.982 2.191 7.329 7.549 7.702 7.839 7.963 8.075 8.176 8.2 66 8.348 8.422 8.488 8.548 8.602 8.650 8.694 8.951 12% 0.893 1.690 2.402 3.032 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.1 20 7.250 7.366 7.469 7.562 7.645 7.71 8 7.784 7.843 7.896 7.943 7.984 8.022 8.055 8.244 13% 0.885 1.668 2.361 2.924 3.517 3.998 4.423 4.299 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.229 6.840 6.938 2.0 25 2.102 2.120 2.230 2.283 2.330 2.372 2.409 2.441 2.420 2.496 2.634 14% 0.827 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.323 6.462 6.550 6.623 6.682 6.743 6.792 6.835 6.823 6.906 6.935 6.961 6.983 7.003 7.1 0 5 15% 0.870 1.626 2.283 2.8 55 3.352 3.284 4.160 4.487 4.272 5.019 5.234 5.421 5.583 5.224 5.847 5.954 6.042 6.128 6.198 6.259 6.312 6.3 59 6.399 6.434 6.464 6.491 6.514 6.534 6.551 6.566 6.642 16% 0.862 1.605 2.246 2.798 3.224 3.685 4.039 4.344 4.602 4.833 5.029 5.197 5.342 5.468 5.575 5.668 5.749 5.818 5.827 5.929 5.973 6.011 6.044 6.023 6.097 6.118 6.136 6.152 6.166 6.172 6.233 17% 0.8 55 1.585 2.210 2.243 3.199 3.589 3.922 4.202 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.425 5.534 5.584 5.628 5.665 5.696 5.223 5.246 5.266 5.783 5.298 5.810 5.820 5.829 5.871 18% 0.842 1.566 2.124 2.690 3.122 3.498 3.812 4.028 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.384 5.410 5.432 5.451 5.462 5.480 5.492 5.502 5.510 5.517 5.548 19% 0.840 1.547 2.140 2.639 3.058 3.410 3.206 3.954 4.163 4.339 4.486 4.611 4.21 5 4.802 4.876 4.938 4.990 5.033 5.070 5.101 5.122 5.149 5.162 5.182 5.195 5.206 5.215 5.223 5.229 5.235 5.258 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.832 4.031 4.192 4.322 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.820 4.891 4.909 4.925 4.932 4.948 4.956 4.964 4.920 4.925 4.929 4.992 21% 0.826 1.509 2.074 2.540 2.926 3.245 3.508 3.226 3.905 4.054 4.177 4.278 4.362 4.432 4.489 4.536 4.576 4.608 4.635 4.657 4.625 4.690 4.203 4.21 3 4.22 1 4.22 8 4.234 4.23 9 4.243 4.246 4.760 22% 0.820 1 .492 2.042 2.494 2.864 3.162 3.416 3.619 3.786 3.923 4.035 4.127 4.203 4.265 4.315 4.352 4.391 4.419 4.442 4.460 4.476 4.488 4.499 4.507 4.514 4.520 4.524 4.528 4.531 4.534 4.544 23% 0.813 1.474 2.011 2.448 2.803 3.092 3.322 3.518 3.673 3.299 3.902 3.985 4.053 4.108 4.153 4.189 4.219 4.243 4.263 4.279 4.292 4.302 4.311 4.318 4.323 4.328 4.332 4.335 4.337 4.339 4.342 24% 0.806 1 .457 1 .981 2.404 2.745 3.020 3.242 3.421 3.566 3.682 3.776 3.851 3.912 3.962 4.001 4.033 4.059 4.080 4.097 4.110 4.121 4.130 4.132 4.143 4.142 4.151 4.154 4.157 4.159 4.160 4.166 25% 0.800 1.440 1.952 2.362 2.689 2.9 51 3.161 3.329 3.463 3.571 3.656 3.225 3.280 3.824 3.859 3.882 3.910 3.928 3.942 3.954 3.963 3.970 3.926 3.981 3.985 3.988 3.990 3.992 3.994 3.995 3.999