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 $16,000 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 $ 4,900 $ 2,800 $ 5,300 $ 7,300 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 $68,000 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 $14,000 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 Agency's required rate of return is 18%. 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 1 Present Value of $1;1(1+r) n 0.893 0.862 0.857 0.842 0.249 Periods 4% 5% 6% 7% % 8% 9% 10% 11% 12% 13% % 14% 15% 16% 17% % 18% 19% 20% 21% 22% 23% 1 24% 25% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.885 0.877 0.870 0.855 0.847 0.840 0.833 0.826 0.820) 0.813 0.806 2 0.800 0.925 0.907 0.890 0.873 0.826 0.812 0.797 0.785 0.783 0.769 0.756 0.743 0.731 0.7180.706 0.694 0.683 0.672 0.661 0.650 3 0.889 0.864 0.840 0.640 0.816 0.794 0.774 794 0.772 0731 0712 0.751 V.1.3 0675 0.693 1.71 0.712 0 658 0641 0.08 0.04 0.624 (609 593 0.579 0.00 0.25 0.564 0.551 ( 512 0.537 4 0763 0.855 2010 0.823 + 0.524 0.512 0.792 W.01. 0.763 4.70 (6590636 0.735 0.683 US 0.708 0 52 0.613 0.0.0.0.30 0.592 V. 0.572 ( 0.552 0.534 V.J4 0.516 0.499 5 W.210 1.49% 0.482 0.467 CU 0.451 4.4702 0.437 0.822 0.784 SC 0.423 0.410 0.747 - 0.713 0.681 W.022 1.43 ( W.147 0.650 1.423 0.593 0.621 9.02 0.567 0.543 10 0.519 9.01 0.497 0.476 Vaata 0.456 0.437 0.419 0370 025 0.402 0.386 0241 TAG 200 6 C 0.341 0.790 MA! 0.746 0.705 O 0.328 VA? 0.370 0.335 ( 535 507 0.666 0.630 0.596 0.564 ASC 0.507 425 0.480 Val Vat 0.456 A1 0.432 1.4.30 0.410 0.390) 0.370 W.. 1711 200 7 0.352 0275 0760 ce 0.335 0319 0.303 0.760 KJP Wall 0.711 1 0.665 9.00 0.289 0.623 W.00. 0.583 0.547 1.273 0.262 0.513 0.400 0.482 Wala 0.452 1.404 1.424 0 376 0.425 0.400 4.422 0.376 0.354 0314 0796 -- 0.333 0 240 0.279 0.263 8 0.14 0.731 0210 0.235 Viac 0.296 0.677 0.222 0.582 01434 404 0.210 0.24 0.29 0.627 Vio 0.540 0.502 Wafa 0.467 0.434 0205 V02 0.376 V.1.34 0.404 0351 0.327 W TO Ti 0.305 Ww 0.266 0.285 ACAS V.. 101 0.233 0.218 9 0.204 160 0.191 0.703 0.179 SVAR 0.645 0.168 0.592 0.544 1.214 0.500 Wa Wala 0.460) 361 V.392 0.424 0.391 0294 V. L 1.40! 0.361 023 Wit2 0.333 0308 W.27 10 0.284 0.263 We 104 0.243 10 0.225 cs W.203 AL 0.194 0.209 0.223 0.180 10 0.167 0124 0.676 W.209 0497 0.155 0.144 Wal 0.614 0.558 0.134 0.508 9.101 0.125 9.070 Walnu 0.463 0.422 V.. Waar 1.403 0.352 0.386 0.322 Waa2 0.295 Waz 0.270 9.272 0.247 0.227 0.208 TOS ad 0.191 0.176 012 9.22 0.162 0.137 0.149 11 102 0.650 0.585 0.126 W.17 ( 0.527 0.475 0.116 0.107 0.12 0.429 0.388 1.0.2 0.287 Valt? 0.317 Wala 0.350 I Wave 0.261 V. 140 0.237 W.207 0.261 0165 0.215 0.195 0.178 0.162 1.23 0.148 0.135 105 0.123 0.112 0.103 Villa 12 0.094 0.625 12 0.086 0.557 0.497 0290 W.02 0.444 0.397 0.356 W.77! 0.319 watery W+ 1.074 107 0.286 0.208 0.257 View 0.231 0168 0.187 V.22 1.2110 0.168 0.152 0.137 0.100 13 0.112 0 0.1020.092 0003 0.601 W.13 9.124 0.530 0.076 0.069 0.469 W.112 0.415 0.368 0.083 VDU W. 140 Valle 0.326 W.07 0.290 Wil 0.258 0.229 0.204 0.182 104 14 0.163 0.145 W.102 0.130 0.116 0.093 OGO 0.084 0.100.104 0.142 14 0.577 0.075 0.068 0.055 W.123 0.442 0.388 0.505 ( W.1704 0.061 VW 0.340 0.299 141 Well 0.263 V200 0.232 0.205 9.203 V.lol 0.181 15 0.125 0.160 0 099 088 W.101 0.141 0.111 W.100 0.481 0.00 0.078 15 OS 0.09 0.088 0.069 9.12 0.555 0.049 0.044 W.707 0.362 0.002 0.055 0.481 W.22223 0.417 183 0.315 0.275 1:41 W.09 0.209 lac 0.239 1.04 0.044 9.212 View 0.160 0.140 10 0.123 9.209 1.10.3 00940074 0.108 0.095 0.084 V.10 0.065 0.057 0.051 16 0.064 0.074 0.534 0.040 0.045 0339 0.035 0.458 0.394 V.2.34 0.292 0.040 0.252 1.224 163 V.39 0.188 0.218 9.2014 10 0.163 0.141 W.100 1.10 0.123 17 0.071 0.062 V.141 0.093 0.107 0.081 0.071 0.093 Wala 0.054 0.047 0020 17 0.042 0.513 0.371 W. 0.002 0.032 0.436 0.317 Want 0.028 0.270 0.036 0.231 Well Vw 0.210 0.198 Von Wallz 1.23 0.170 0.146 10 0.125 0.108 1.170 0.080 00600052 0.093 V.VO 0.069 0.060 Wala 0.045 0.039 1.000 0.1124 18 0.034 0.494 0.030 0002 0.026 0.416 Want 0.350 9.410 V.134 0.023 0.296 V.JU W.290 0.250 0.212 0.250 0081 0064 0.180 0.153 0.130 0.111 Vice 0.095 0051 0.081 Vi 0.059 0.051 0.00% 0 396 0331 0.044 19 0.038 0.032 0.028 9.20.1144 0.024 W. 0.475 0.018 V.UZO 0.024 0.021 0.277 110 VA12 0.232 0.194 0.390 0.164 0.138 1.217 W.V21 0070006 0.116 0.018 0.098 W.1024 0.083 00430027 Wave V.12 0277 0.051 0.043 Warn 0.00 0.00 20 0.031 0.037 0.027 0.023 0.456 0.377 0.312 0.258 Vale 0.020 0.017 0.014 0124 104 Wala 0.215 0.178 0.149 0.124 WAZ WX W12 V.250 0.212 V.12+ 0.104 0.087 0.073 0.0187 0.061 VND 0.051 0.043 0.037 21 9.V 0.031 0242 199 0.026 0.359 W.12 V.VN W. 0.439 0.022 0.019 0.016 0.014 0.012 0020003 0.294 0.242 V.2.3 0.199 0.164 0.135 0.112 W.112 0.093 0.077 ! 0.064 0053 0.044 0.03 0.044 0.037 0.031 0.026 22 0.022 0.018 | 0.015 0.013 0.009 WN1Z2 0.011 0.342 24 0.422 V.422 0.342 0.278 0.226 1840 150 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0056 0.068 0046 0.008 0.00 0.040 VVD 0.038 0.032 0.026 0.020 0.022 0.018 0.013001 0.015 | 0.013 23 0.011 0.007 W.1124 0.009 0.406 Warto 0.326 0.211 0.262 0.170 0.138 0.074 0.112 9.112 0.091 0.074 0060 00400022 0.000 0.049 0.10/49 0.027 0.022 0.040 | 0.033 0.024 0.018 24 0.015 0010 0.390 WAVO 0.012 0.010 Wall 0.007 0.009 0.247 0.197 4.1917 0.006 0.158 0.126 0.102 0.082 0.082 0.066 0.053 0035 0028 0.043 0.033 0.022 0.023 0.019 0.015 0.013 0.010 0.375 W.VI. 0.008 0.007 0.295 0.233 0.006 0.005 0.184 Warta 0.146 116 0.092 0.074 0.074 0.059 0.047 0.038 0.030 0.024 0.0200.016 0.016 0.013 0.010 0.009 0.007 0.006 0.361 0.281 0.004 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 0.009 0.007 0.006 0.005 0.004 0.003 27 0.347 0.268 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 0.011 0.009 0.007 0.006 0.005 0.0040.003 0.002 28 0.333 0.255 0.1960.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 | 0.012 0.012 0.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002 29 0.321 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 0.005 0.004 0.003 0.002 0.002 0.002 30 0.308 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 0.004 0.003 0.003 0.002 0.002 0.001 40 0.208 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 0.001 0.000 0.000 0.000 0.000 0.000 0.310 25 0.005 26 EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears; 1711-1(1+1)n] Periods 4% 5% 6% 7% % 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 1 0.962 0.952 0.943 0.935 0.926 0.917 | 0.909 0.901 0.893 0.885 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 | 0.800 2 1.886 | 1.859 1.833 1,808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1.509 1.492 1.474 | 1.457 1.440 3 2.775 2.723 2.673 2.624 2.577 2.531 | 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 2,074 2.042 2.011 1.981 1.952 4 2910 oc 3.630 3.546 3.465 3.387 ver 3.312 3.240 3.170 3.102 3.037 2.974 2.914 101 2.855 2.798 2.743 2.690 We found 2.589 2.639 2.540 2.494 o w 2.448 | 2.404 2.362 5 or 4.452 4.329 re 4.212 4.100 2400 3.993 400 ec or ec 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 2.991 2.926 ter 3.058 2.864 2.803 2.745 2.689 a and were 6 Hace 5.242 5.076 a 4.917 4.767 4.623 meer 4.4864.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 Time 3.498 3,410 3.326 3.245 3.167 3.092 - 3.020 | 2.951 7 can 6.0025.786 Loco ad we 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 Stara 4.288 4.1604.039 3.922 3,812 3,706 3.508 3.416 3.327 . 3.605 3.242 aw Tec 8 6.733 6.463 cand 3.161 no - 5.971 5.747 6.210 5.146 woer ce 1007 5.535 5.335 We Den w 4.968 4.799 4.639 4,078 100 Vidy 4.487 4.344 4.207 10 3.954 3.726 3.837 3.619 3.518 3.421 3.329 are oor nea Ture 9 Tack wewe 7.435 7.108 6.802 6.515 6.247 5.995 5.9955.759 5.537 5.328 5.132 wa 4,607 tore 4.9464.772 4.303 4.451 re 4.163 3,905 4.031 3.786 on **** 3.673 3.566 mond ce 8.111 3.463 ardy Wor 10 To 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4,339 dan 4,054 4.192 are to 3.923 3.799 3.682 3.571 ! 2 [ 11 8.760 cara 8.306 7.139 0 7.887 ve 6.495 7.499 6.805 6.207 5.938 5.687 5.453 5.234 e Since 5.029 4.836 4.656 200 4.327 . 4.486 4.177 wo 4.035 Severo 3.902 2049 3.7763.656 12 we 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 2006 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4,611 4.439 ta 4.278 4.127 3.985 3.725 noe 3.851 -110 Tiar ace 13 9.986 | 9.394 es 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 wana 5.118 4.910 wa 4.715 4.533 4.053 4.3624.203 od 3.912 3.780 qua 200 zac 14 Tawe 10.563 | 9.899 9.295 8.745 nam an 8.244 6.982 6.628 7.786 7.367 6.302 6.0025.724 5,468 5.229 5.008 tita 4.802 4.611 4.432 4.265 4.108 an 3.962 3.824 so 15 11.118 10.380 | 9.712 9.108 8,061 one 8.559 ne 7.191 7.606 6.811 6.462 6.142 5.847 5.575 5.324 5,092 4.876 4.675 4.489 4.315 4.153 we 3.859 2002 16 mu re 11.652 10.838 10.106 9.447 4.001 und 100 Tave 8.851 8.313 7.824 7.3796.974 charitama or 6.604 5.954 | 5.668 5.405 11090 6.265 www 5.162 4.730 4.536 4.938 4.357 4.189 4.033 3.887 17 men 12.166 | 11.274 10.477 9.763 ad 12. ma 9.122 8.544 8.022 7.549 7.120 7.120 6.7296.373 6.373 6.047 5.749 5.475 Loco 5.222 4.391 . 4.990 4.775 4.576 4.219 4.059 3.910 idade 18 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250 mons 6.840 6.4676.128 5.818 5.534 5,033 5.273 on 4.419 4.243 I www 4.812 4.608 10 Dev 4.080 3.928 19 13.134 | 12.085 | 11.158 10.336 9.604 mm 8.950 7.839 03 8.365 7.366 1940 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 100 4.442 4.263 10 cu cos 4.097 3.942 13.590 12.462 11.470 10.594 | 9.818 20 8.514 200 to 7.963 12 9.129 2013 7.469 7.025 6.623 6.259 5.929 5.628 rotomoto 5.353 5.101 4.870 4.657 4.460 4.279 4.110 3.954 ve 14.029 12.821 11.764 10.836 10.017 9.292 8.649 ce 21 ma 8.075 7.562 7.1026.687 6.3125.973 5.665 en mit 5.384 5.127 4.891 4.675 10. 4.476 4.292 4.121 3.963 200 aces To 22 14.451 13.163 12.042 11.061 10.2019.442 8.772 8.176 7.645 7.170 6.743 na 6.359 6,011 5.696 5.410 5.149 4.909 ocation statutiara 4.690 4.488 4.302 wand ana 4.130 3.970 02 23 14.857 13.489 12.303 11.272 10.371 9.580 To 8.883 8.266 7.718 son 7.230 6.792 6.399 6.044 5.723 249 5.432 otomotoren 5.167 4.925 4.703 4.499 4.311 4.137 | 3.976 24 cond 240 15.247 | 13.799 12.550 11.469 10.529 9.707 | 8.985 cam 2003 8.348 co To 7.283 1097 6.835 7.784 6.434 6.073 5.746 mu 2004 5.182 5.451 4.937 4.713 4.507 4.318 matracat 2007 4.143 3.981 15.622 14.094 12.783 11.654 10.675 9.8239.077 sec 8.422 7.843 040 25 11401 7.330 6.873 6.464 6.0975.766 5.467 5.195 4.948 4.721 4.514 4.323 4.147 3.985 26 20 15.983 14.375 13.003 11.826 10.8109.929 | 9.161 8.488 7.896 7.372 6.906 6.491 6.118 5.783 074 5.480 Jilo 4.328 5.206 4.956 4.728 20 4.151 3,988 320 3.900 27 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7.943 10.330 |14.043 7.409 6.514 6.935 20!! 6.136 5.492 5.798 0.14 5.215 20 4.332 4.964 4.734 4.524 2.212 4.154 | 3.990 28 16.663 14.898 13.406 12.137 11.051 10.116 | 9.307 8.602 7.984 7.441 6.534 6.961 71704 0.70 5.502 6.152 5.223 0.34 5.810 2010 Ville 4.970 4.739 4.528 4.335 4.157 3.992 29 16.984 15.141 13.591 12.278 11.158 10.1989.370 8.650 8.022 7.470 6.983 6.551 12.10 6.166 5.820 5.510 5.229 4.975 4.743 4.531 4.337 4.159 | 3.994 30 17.292 | 15.372 13.765 12.409 11.258 10.274 | 9.427 8.694 8.055 7.003 6.566 6.177 5.829 5.517 5.235 4.979 4.7464.534 4.339 4.160 3.995 40 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 | | 8.244 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999 7.496