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 $20,000 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 $ 5,300 Repairs, first year $ 3,200 Repairs, second year $ 5,700 Repairs, third year $ 7,700 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 $72,000 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 $16,000 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 16%. REQUIRED 1 What is the net present value of the cash flows associated with the purchase alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.) Net present value REQUIRED 2 What is the net present value of the cash flows associated with the lease alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.) Net present value
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 $20,000 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 $ 5,300 Repairs, first year $ 3,200 Repairs, second year $ 5,700 Repairs, third year $ 7,700 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 $72,000 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 $16,000 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 16%. REQUIRED 1 What is the net present value of the cash flows associated with the purchase alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.) Net present value REQUIRED 2 What is the net present value of the cash flows associated with the lease alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.) Net present value
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
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 $20,000 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 | $ | 5,300 |
| Repairs, first year | $ | 3,200 |
| Repairs, second year | $ | 5,700 |
| Repairs, third year | $ | 7,700 |
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 $72,000 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 $16,000 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
REQUIRED 1
What is the
|
|
|
REQUIRED 2
What is the net present value of the cash flows associated with the lease alternative? (Round your final answer to the nearest whole dollar amount. Enter negative amount with a minus sign.)
|
|
|
Transcribed Image Text:EXHIBIT 12B-1 Present Value of $1;
(1+r)"
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 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800
2
0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812
0.797 0.783 0.769 0.756 0.743 0.731
0.718
0.706 0.694 0,683 0.672 0,661 0.650 0,640
3
0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731
0.712 0.693 0,675 0.658 0,641 0,624 0.609 0.593 0.579 0.564 0.551 0.537 0,524 0,512
4
0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410
0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0419 0.402 0.386 0.370 0.355 0.341 0.328
6
0,790 0,746 0,705 0,666 0,630 0.596 0,564 0.535 0,507 0.480 0,456 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.262
7
0.760 0.711
0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210
8
0,731 0.677 0,627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0.191
0.179
0.168
0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180
0.167
0.155 0144
0.134
10
0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191
0.176 0.162 0.149
0.137
0.126 0.116
0.107
11
0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317
0.287 0.261 0.237 0.215 0.195 0.178
0.162
0.148 0.135 0.123
0.112
0.103
0.094 0.086
12
0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137
0124 0.112
0.102
0.092 0.083 0,076 0,069
13
0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163
0.145
0.130
0.116
0.104 0.093 0,084 0.075 0,068 0.061 0,055
14
0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.1
0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044
15
0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035
16
0.534 0.458 0.394 0.339 0.292 0.252 0.218 0188 0.163 0.141
0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.036 0.032 0.028
17
0.513
0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023
18
0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111
0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018
19
0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116
0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.014
20
0.456 0.377 0.312 0.258 0.215 0.178
0.149 0.124
0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.012
21
0.439 0.359 0.294 0.242 0.199
0.164
0.135
0.112
0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 0.018
0.015 0,013
0.011
0.009
22
0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.007
23
0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 0.010 0.009 0.007 0.006
24
0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005
25
0.375 0.295 0.233 0.184 0.146 0.116
0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004
26
0.361 0.281 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 0.207 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 0.004 0.003 0.002
28
0.333 0,255 0.196
0.150 0116
0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 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
Transcribed Image Text:EXHIBIT 12B-2 Present Value of an Annuity of $1 in Arrears;
(1+r)"
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 0.877 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
3.630 3.546 3.465
3.387 3.312
3.240 3.170
3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362
4.452
4.329
4.212
4.100
3.993
3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689
5.242 5.076
4.917
4.767
4623
4.486 4.355 4.231 4.111
3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951
7
6.002
5.786
5.582
5.389 5.206
5.033 4.868 4.712
4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161
8
6.733
6.463
6.210
5.971
5.747
5.535 5.335 5.146
4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329
7435
7.108
6.802
6.515
6.247
5.995 5.759 5.537 5.328 5.132
4.946 4.772 4.607 4.451
4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463
10
8.111
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 4.192
4.054 3.923 3.799 3.682 3.571
11
8.760 8.306 7.887
7.499
7.139
6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656
12
9.385
8.863
8.384
7.943
7.536
7.161
6.814 6.492 6.194
5.918 5.660 5.421 5.197
4.988 4793 4,611
4.439 4.278 4.127 3.985 3.851 3.725
13
9.986 9.394 8.853
8.358 7.904
7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118
4.910 4.715
4.533 4.362 4.203 4.053 3.912 3.780
14
10.563
9.899 9.295
8.745
8.244
7.786 7.367 6.982 6,628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
4.432 4.265 4.108 3.962 3.824
15
11.118
10.380
9.712
9.108
8.559
8.061 7.606 7191
6.811 6.462 6.142
5.847 5.575 5.324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859
16
11.652 10.838 10.106
9.447
8.851
8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 4.536 4.357 4.189
4.033 3.887
17
12.166 11.274
10.477
9.763
9.122
8.544 8.022 7.549 7120
6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219
4.059 3.910
18
12.659 11.690
10.828 10.059
9.372
8.756 8.201 7702 7.250 6.840 6.467 6.128
5.818 5.534 5.273 5.033 4.812
4608 4.419
4.243 4.080 3.928
19
13.134
12.085 11.158
10.336
9.604
8.950 8.365 7.839 7.366 6.938 6.550 6.198
5.877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942
20
13.590 12.462 11.470 10.594 9.818
9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101
4.870 4.657 4.460 4.279 4.110
3.954
21
14.029 12.821 11.764 10.836 10.017
9.292 8.649 8.075 7.562 7102
6.687 6.312 5.973 5.665 5.384 5.127 4.891 4.675 4.476 4.292 4.121
3.963
22
14.451 13.163
12.042 11.061
10.201
9.442 8.772 8176 7645 7170
6.743 6.359 6.011 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970
23
14.857 13.489 12.303 11.272 10.371
9.580 8.883 8.266 7.718
7.230 6.792 6.399 6.044 5.723 5.432 5.167
4.925 4.703 4.499 4.311
4.137
3.976
24
15.247 13.799
12.550 11.469 10.529
9.707 8.985 8.348 7784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937 4.713
4.507 4.318 4.143 3.981
25
15.622 14.094 12.783 11.654
10.675
9.823 9.077
8.422 7843
7.330
6.873 6.464 6.097 5.766 5.467 5.195 4.948 4.721
4.514
4.323 4.147
3.985
26
15.983 14.375 13.003 11.826 10.810
9.929 9.161
8.488 7.896 7.372 6.906 6.491 6.118
5.783 5.480 5.206 4.956 4.728 4.520 4.328 4.151
3.988
27
16.330 14.643 13.211 11.987
10.935
10.027
9.237 8.548 7,943 7,409 6.935 6.514 6.136
5.798 5.492 5.215 4.964 4.734 4.524 4.332 4.154
3.990
28
16.663 14.898 13.406 12.137
11.051
10.116
9.307 8.602 7984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 3.992
29
16.984 15.141
13.591 12.278 11.158
10.198
9.370 8.650 8.022 7.470
6.983 6.551 6.166 5.820 5.510 5.229 4.975 4743
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 7.496 7.003 6.566 6.177
5.829 5.517 5.235 4.979 4.746 4.534 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
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