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?
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter12: Capital Investment Decisions
Section: Chapter Questions
Problem 46P: Net Present Value and Competing Alternatives Stillwater Designs has been rebuilding Model 100, Model...
Related questions
Question
![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?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 2 images
Recommended textbooks for you
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning