Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed
image text in transcribed
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 vears 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 $27,000 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 $ 4,300 $ 2,200 2,200 $ 4,700 $ 6,700 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 $62,000 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 $11,000 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. lease contract. Riteway Ad Agency's required rate of return is 15% Use Excel or a financial calculator to solve Use Excel or a financial calculator to solve. 2 > Required: 1. Use the total-cost approach to determine the present alternative. (Any cash outflows should be indicat cash flows associated with each sign. Round to the nearest dollar.) 1 2 3 1 LED . 1. $ 0 $ O Purchase Alternative: Purchase of cars Annual servicing costs Repairs Resale value of cars Total cash flows Net present value Lease Alternative: Security deposit Annual lease payments Refund of deposit Total cash flows Net present value 2 III. I. 3 LITT .. OTTO . 11 TIL ST A $ 0 $ $ $ BEL 2. Which alternative should the compa Lease alternative Purchase alternative

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Exploring Strategic Change

Authors: Julia Balogun, Veronica Hope Hailey, Stafanie Gustafsson

4th Edition

0273778919, 9780273778912

More Books

Students also viewed these Accounting questions