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 $ 5,500 $ 3,400 $ 5,900 $ 7,900 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 $74,000 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 $17,000 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 18%. Use Excel or a financial calculator to solve.
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 $ 5,500 $ 3,400 $ 5,900 $ 7,900 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 $74,000 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 $17,000 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 18%. Use Excel or a financial calculator to solve.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $15,000 each. If this
alternative is accepted, the following costs will be incurred on the fleet as a whole:
2$
Annual cost of servicing, taxes, and licensing
Repairs, first year
Repairs, second year
Repairs, third year
5,500
2$
3,400
2$
5,900
2$
7,900
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 $74,000 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 $17,000 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 18%.
Use Excel or a financial calculator to solve.
Transcribed Image Text:Required:
1. Use the total-cost approach to determine the present value of the cash flows associated with each
alternative. (Any cash outflows should be indicated by a minus sign. Round to the nearest dollar.)
Now
2
Purchase Alternative:
Purchase of cars
Annual servicing costs
Repairs
Resale value of cars
Total cash flows
$
2$
Net present value
Lease Alternative:
Security deposit
Annual lease payments
Refund of deposit
Total cash flows
2$
$
2$
Net present value
2. Which alternative should the company accept?
Purchase alternative
Lease alternative
%24
%24
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