The Riteway Ad Agency provides cars for its sales staff. Its 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 and sell them in three years. Ten cars would be purchased for $15,000 each. If this alternative is chosen, the entire fleet will incur the following costs: Annual cost of servicing, taxes, and licensing $ 3,100 Repairs, first year $ 1,000 Repairs, second year $ 3,500 $ 5,500 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 costing $50,000 per year (the first payment due at the end of Year 1). As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $10,500 security deposit at the beginning of the lease period, which would be refunded at the end of the lease contract. Riteway Ad Agency's required rate of return is 19%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 3. Which alternative should the company accept?
The Riteway Ad Agency provides cars for its sales staff. Its 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 and sell them in three years. Ten cars would be purchased for $15,000 each. If this alternative is chosen, the entire fleet will incur the following costs: Annual cost of servicing, taxes, and licensing $ 3,100 Repairs, first year $ 1,000 Repairs, second year $ 3,500 $ 5,500 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 costing $50,000 per year (the first payment due at the end of Year 1). As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $10,500 security deposit at the beginning of the lease period, which would be refunded at the end of the lease contract. Riteway Ad Agency's required rate of return is 19%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 3. Which alternative should the company accept?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The Riteway Ad Agency provides cars for its sales staff. Its 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 and sell them in three years.
Ten cars would be purchased for $15,000 each. If this
alternative is chosen, the entire fleet will incur the
following costs:
Annual cost of servicing, taxes, and licensing
$ 3,100
Repairs, first year
$ 1,000
Repairs, second year
$ 3,500
$ 5,500
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 costing $50,000 per year (the first payment due at the
end of Year 1). As part of this lease agreement, the owner
would provide all servicing and repairs, license the cars, and
pay the taxes. Riteway would make a $10,500 security deposit at
the beginning of the lease period, which would be refunded at
the end of the lease contract.
Riteway Ad Agency's required rate of return is 19%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the purchase alternative's net present value.
2. What is the lease alternative's net present value.
3. Which alternative should the company accept?
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