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 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 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 $26,400each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole:

Annual cost of servicing, taxes, and licensing$4,100Repairs, year 11,810Repairs, year 24,875Repairs, year 37,975

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 $84,000per 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 $30,750security 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.

Wrongway's required rate of return is 18%.

Click here to viewExhibit 10-1andExhibit 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.)

PresentAmount of18%Value ofItemYear(s)Cash FlowsFactorCash FlowsPurchase 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)?

Lease of carsPurchase of fleet