Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO12-2] 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 $15,000 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 $3,100 $1,000 $3,500 $5,500 Repairs, second year Repairs, third year 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 $50,000 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 $10,500 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 19% Click here to view Exhibit 128-1 and Exhibit 128-2. 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 not present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept?
Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO12-2] 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 $15,000 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 $3,100 $1,000 $3,500 $5,500 Repairs, second year Repairs, third year 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 $50,000 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 $10,500 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 19% Click here to view Exhibit 128-1 and Exhibit 128-2. 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 not present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO12-2]
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 $15,000 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
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 $50,000 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 $10,500 security deposit at the beginning of the lease period, which would
be refunded when the cars were retumed to the owner at the end of the lease contract.
$3,100
$1,000
$3,500
$5,500
Riteway Ad Agency's required rate of return is 19%
Click here to view Exhibit 128-1 and Exhibit 128-2, 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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6e2624e7-e40a-4833-b7d2-fd85f3be9cb6%2Fd1483044-ad88-4fd3-bd82-484e7687301c%2F59d62mq_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO12-2]
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 $15,000 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
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 $50,000 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 $10,500 security deposit at the beginning of the lease period, which would
be refunded when the cars were retumed to the owner at the end of the lease contract.
$3,100
$1,000
$3,500
$5,500
Riteway Ad Agency's required rate of return is 19%
Click here to view Exhibit 128-1 and Exhibit 128-2, 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?
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