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 $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 | $ | 5,300 |
| Repairs, first year | $ | 3,200 |
| Repairs, second year | $ | 5,700 |
| Repairs, third year | $ | 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 Agencys required rate of return is 16%.
Click here to view Exhibit 7B-1 and Exhibit 7B-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?
Periods 4% 5% 5% 8% 9% 10% 1% 2% % 4% 5% 16% 17% 18% 19% 20% 2% 22% 23% 24% 25% 1 0.962 0.952 0.943 0935 0926 0.97 0909 0.901 0893 0.885 0.8 0.870 0.862 0.855 0.847 0840 0833 0826 0.820 08 0.806 0.800 2 0.925 0.907 0.890 08783 0.857 0842 0825 0.82 0797 0.783 0.769 0.756 0.743 0.31 0.718 0.706 0.594 0.683 0.672 0661 0650 0.640 3 0.889 0.864 0.840 0.86 0.794 072 0.51 0731 0712 0693 0675 0658 0641 0624 0609 0593 059 0564 0551 0537 0524 0512 4 0.855 0.823 0.792 0.763 0.735 0708 0.683 0659 0636 0613 0.592 0.572 0.552 0534 0516 0499 0482 0467 0.451 0437 0423 0.410 5 0.822 0.784 0747 0713 0681 0650 0621 0593 0.567 0.543 0.519 0497 0476 0.456 0437 0419 0402 0386 0370 0355 0341 0328 6 0790 0746 0705 0666 0630 0596 0564 0535 0507 0480 0456 0432 0410 0390 0370 0352 0335 0319 0.303 0289 0275 0262 7 0760 07/10665 0623 0.583 0547 0513 0482 0452 0425 0.400 0.376 0354 0333 0314 0296 0279 0263 0.249 0235 0222 0210 03 067 0627 0.582 0.540 0502 0467 0434 0404 0376 0351 0327 0.305 0285 0266 0249 0233 0218 0204 091 0179 0168 9 0703 0.645 0592 0.544 0500 0460 0424 0391 0361 0.333 0.308 0284 0263 0243 0225 0209 0194 0180 0167 0155 0.144 0134 10 0.676 0.614 0.558 0.508 0.463 0422 0.386 0.352 0.322 0295 0.270 0.247 0.227 0.208 0191 0176 0.162 0.149 0137 0126 0116 0.107 0.650 0.585 0.527 0.475 0429 0.388 0.350 0.37 0.287 0261 0.237 0.215 0.195 0.178 0.162 0.148 0135 0123 012 0103 0.094 0.086 0.625 0.557 0497 0.444 0397 0356 0.319 0.286 0257 0231 0208 0.187 0.168 0152 017 0124 012 0102 0.092 0083 0.076 0.069 0601 0.530 0469 045 0368 0326 0290 0258 0229 0204 0182 0163 0.145 0130 016 0104 0093 0084 0.075 0068 0061 0.055 14 057 0505 042 0388 0340 0299 0263 0232 0205 0181 0160 041 0125 0 0.09 0088 0078 0069 0.062 0055 0049 0044 055 0481 047 0362 0316 0275 0239 0209 0183 0160 0140 013 0108 0095 0.084 0074 0065 0057 0.051 0045 0040 0035 16 0.534 0458 0394 0339 0292 0252 0218 0188 0163 0141 0123 0107 0093 0081 0071 0062 0054 0047 0042 0036 0.032 0028 17 0.513 0436 0.371 0317 0270 0231 0198 0170 0146 0.125 0108 0.093 0.080 0.069 0.060 0052 0045 0039 0.034 0030 0026 0.023 0.494 0.416 0.350 0296 0.250 0212 0.180 0.153 0.130 011 0.095 0.081 0.069 0.059 0.051 0.044 0038 0.032 0.028 0024 0.021 0.018 9 0.475 0.396 0.331 0.27 0.232 0194 0.164 0.138 0.16 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.00 0.014 20 0.456 0.37 0.32 0.258 0.215 0.178 0149 024 0104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.012 21 0439 039 0294 0242 0199 064 0135 012 0.093 0.07 0.064 0.053 0.044 0.037 0.031 0026 0022 0018 0.05 003 0.01 0000 22 0422 0342 0278 0226 0184 0150 023 0101 0083 0068 0056 0.046 0.038 0032 0.026 0022 0018 0015 0013 00 0009 0007 23 0406 0326 0262 021 0170 0138 012 001 0074 0060 0049 0040 0.033 0027 0.022 0018 0015 0012 0010 0009 0007 0006 24 0.390 0310 0.247 0197 0158 0126 0102 0082 0066 0053 0043 0035 0028 0023 0019 0015 0013 0010 0.008 0007 0006 0005 25 0.35 0295 0233 0184 0146 0116 0092 0074 0059 0047 0038 0030 0024 0.020 0.016 0013 0010 0009 0.007 0006 0005 0.004 26 0361 0281 0.220 0172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.01 0.009 0.007 0.006 0005 0.004 0.003 27 0.347 0.268 0.207 0161 0125 0.098 0.076 0.060 0.047 0.037 0.029 0023 0.018 0.014 0.01 0.009 0.007 0.006 0.005 0.004 0.003 0.002 28 0.333 0.25 0.196 0.150 [016 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.02 0.010 0.008 0.006 0.005 0.004 0003 0.002 0.002 29 0321 0.243 0.185 0.141 0107 0.082 0.063 0.048 0.037 0.029 0.022 0.07 0.014 0.01 0.008 0006 0.005 0.004 0.003 0.002 0.002 0.002 30 0.308 0.231 0174 0131 0.099 0075 0057 0044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0005 0004 0.003 0.003 0002 0.002 0.001 40 0208 0142 0097 0067 0046 0032 0022 005 001 0008 0005 0004 0003 0002 0.001 0001 0001 0000 0000 0000 0000 0000 HHH Periods 4% % 6% % 8% 9% 10% 1% 2% 13% 14% % 6% 17% 183 19% 20% 21% 22% 23% 24% 25% 1 0962 0952 0943 0935 0926 0917 0909 0901 083 088 080870 082 0855 0847 0840 0833 0826 0820 082 0806 0800 2 1886 1859 1833 1808 1783 1759 17.36 1713 1690 168 1647 1626 1605 1585 1566 1547 1528 1509 1492 1474 1457 1440 3 2775 2723 2673 2624 2577 2531 2.487 2.444 2402 2.36 2322 2.283 2.246 2210 2.74 2.140 2.106 2.074 2.042 2.0t 1.981 1952 4 3.630 3546 3.465 3387 3312 3240 1170 3102 3037 2974 2014 2855 2798 2743 2690 2639 2589 2540 2494 2.448 2404 2362 5 4452 4329 4212 4.100 3993 3.890 3791 3696 3605 3.57 3433 3352 3274 3199 3127 3058 2991 2926 2864 2803 2745 2689 6 5242 5076 497 4.767 4.623 4.486 4.355 4.231 4 3998 389 3784 3.685 3589 3.498 3410 3326 3245 367 3.092 3.020 2951 7 6002 5786 5.582 5289 5206 5.03 4868 4.72 4.564 4.423 4288 4160 4039 3922 3812 3706 3605 3508 3416 3327 3242 3161 8 6133 6.463 6210 5971 5.747 5535 5.335 5.146 4968 4.79 4.639 4.487 4.344 4207 4078 3954 3837 3726 3619 3.518 3421 3329 9 7435 7108 6.802 6515 6247 5995 5.79 5537 5328 532 4.946 472 4.607 4.41 4303 4163 4031 3905 3786 33 356 3463 10 811 722 7360 7024 6710 6418 6145 5889 5650 5426 5216 5.09 4833 4659 4494 4339 4192 4054 3923 3799 3682 3571 11 8.760 8306 787 7499 C139 6805 6.495 6207 5938 5.687 5453 5.234 5.029 4.836 4.656 4.486 4.32] 4 4.035 3902 376 366 2 9385 8863 8384 1943 7536 761 6.84 6.492 6.194 5.918 5660 5.421 5.197 4.98 4793 4.611 4.439 4278 4.127 3.985 3.851 3.725 13 9986 9394 8853 8358 7904 7487 7103 6750 6424 6122 5842 5583 5342 518 4910 4715 4533 4362 4203 4053 3.92 3780 4 10.563 9899 9.295 8745 8244 7786 7367 6982 6628 6302 6002 5724 5468 5229 5.008 4.802 46k 4.432 4.265 4.108 3962 3824 11 118 10 380 9712 9108 8.559 8061 7606 7191 6811 6462 6.142 5.847 5.57 5324 5.092 4.876 4.675 4.489 4.35 4.3 4.001 3859 16 1552 0838 10.106 9447 8851 8.33 7824 139 6974 6.604 6265 5954 5.668 5405 5162 4.938 4730 4.536 4357 4189 4.033 3887 7 2.166 1274 0.47 9763 9.122 8544 8.022 7.549 T120 6.7296373 6.047 5.749 5475 5.222 4.990 4.5 4.576 4.391 4.29 4.059 3.910 18 2.659 1690 10 828 10.059 9372 8756 8.201 7702 72500 6840 6467 6128 5818 5534 5273 5033 4.82 4608 4.49 4243 4.080 3928 13.14 2085 158 10.336 9604 8.950 8.365 7889 7366 6938 6550 6.198 587 5.584 5316 5070 4843 4635 4.42 4263 4.097 3942 20 3.590 2462 1.470 0.594 9818 9.129 8.54 7963 749 7025 6623 6.259 59295628 5.353 5.101 4.870 4.65] 4.460 4.279 4.110 3954 21 4.029 2821 1764 10 836 1001 9292 8649 8075 7562 7102 6687 62 53 5665 534 527 4891 4675 4476 4292 4121 3963 22 4.451 3163 2.042 11061 10.20 9442 8.72 8176 7645 770 6.743 6.359 601 56 5410 5.148 4909 4690 4.48 4302 4.130 3970 23 4.87 3489 2303 1272 10.31 9580 8.883 8266 7718 7230 6792 6.399 6044 5723 5432 567 4925 4.703 4499 4.31 4.37 3976 24 5 247 379 2550 11469 10529 9707 8985 8348 7784 7283 6835 5434 503 5746 5451 52 4937 4713 4507 4318 4143 3981 25 5.622 14.094 2.783 1654 10.675 9823 90 8422 7843 7330 6873 6.464 6097 5766 5467 595 4948 4.721 4514 4323 447 3985 26 5.983 4.35 3.003 1826 10.810 9929 961 8488 7896 7372 6906 6491 6.118 5.783 5480 5206 4956 4728 4.520 4328 4.151 3988 27 6.330 4.43 211 1987 10935 10027 9237 8548 7943 7409 5935 654 5136 5798 5.492 5215 4964 434 4.524 4332 4154 3990 28 16.663 4.898 1.406 2.137 1.051 10.16 9307 8.602 1984 7441 6961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4528 4.335 4.157 3.992 29 6 984 541 1.591 2 278 1158 0 198 9370 8650 80227470 6983 6551 6166 5820 550 5229 4975 4743 4.531 4337 4159 3994 30 792 5372 765 240 258 0274 9427 8694 8055 7495 7003 6566 6 5829557 5235 4979 4.745 454 4.39 4160 3995 40 9.793 2159 6.046 3.332 1.925 10.757 9.779 8951 8244 7634 7105 6.642 6.233 5.81 5.548 5.258 4.997 4.760 4.544 4.34] 4.166 3999
