The Wrongway 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 as follows:

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 $18,800 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	$	7,600
Repairs, year 1		2,220
Repairs, year 2		5,050
Repairs, year 3		8,075

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 $59,500 per year (with 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. Wrongway would be required to make a $19,750 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.

Wrongways required rate of return is 18%.

Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.

1. Use the total cost approach to determine the present value of the cash flows associated with each alternative. (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal places. Round other intermediate calculations and final answers to the nearest whole dollar amounts.)

						Present
		Amount of			18%	Value of
Item	Year(s)	Cash Flows			Factor	Cash Flows
Purchase of fleet:
Initial payment cars	(Click to select) Now 1 2 3 1-3	$				$
Annual cost of servicing, taxes and licensing	(Click to select) Now 1 2 3 1-3
Repairs Year 1	(Click to select) Now 1 2 3 1-3
Repairs Year 2	(Click to select) Now 1 2 3 1-3
Repairs Year 3	(Click to select) Now 1 2 3 1-3
Resale value of the fleet	(Click to select) Now 1 2 3 1-3
Present value of cash outflows						$
Lease of cars:
Initial deposit	(Click to select) Now 1 2 3 1-3	$				$
Lease payments	(Click to select) Now 1 2 3 1-3
Return of deposit	(Click to select) Now 1 2 3 1-3
Present value of cash outflows						$

2.

Which alternative should the company accept based on the calculations in part (1)?

multiple choice 10

• Purchase of fleet

• Lease of cars