The Wrongway 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 as follows: 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 $23,800 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 Repalrs, year 1 Repairs, year 2 Repalrs, year 3 $5.200 2,050 5,625 6,800 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 $75,500 per year (with 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. Wrongway would be requlred to make a $23,500 security deposit at the beginning of the lease perlod, which would be refunded when the cars were returned to the owner at the end of the lease contract. Wrongway's required rate of return is 18%.
The Wrongway 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 as follows: 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 $23,800 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 Repalrs, year 1 Repairs, year 2 Repalrs, year 3 $5.200 2,050 5,625 6,800 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 $75,500 per year (with 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. Wrongway would be requlred to make a $23,500 security deposit at the beginning of the lease perlod, which would be refunded when the cars were returned to the owner at the end of the lease contract. Wrongway's required rate of return is 18%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The Wrongway 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 as follows:
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 $23,800 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
Repalrs, year 1
Repalrs, year 2
Repalrs, year 3
$5.200
2,050
5,625
6,800
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 $75,500 per year (with the first payment due at the end of
year 1). As part of this lease cost, the owner would provide all servicing and repalrs.
license the cars, and pay all the taxes. Wrongway would be requlred to make a
$23,500 security deposit at the beginning of the lease perlod, which would be
refunded when the cars were returned to the owner at the end of the lease contract.
Wrongway's required rate of return is 18%.
Transcribed Image Text:1. Use the total cost approach to determine the present value of the cash flows assoclated with each alternative. (Negative amounts
should be Indicated with a minus sign. Round discount factor(s) to 3 decimal places. Round other Intermediate calculations and final
answers to the nearest whole dollar amounts.)
Present
Value of
Amount of
Cash
Flows
18%
item
Year(s)
Factor Cash Flows
Purchase of fleet
Initlal payment- cars
Annual cost of servicing. (Click to select) V
taxes and licensing
Repalrs - Year 1
Repalrs – Year 2
Repalrs - Year 3
Resale value of the fleet (Click to select) V
(Click to select) V 9
(Click to select)
(Click to select) v
(Click to select)
Present value of cash
outflows
Lease of cars:
Inltlal deposit
(Click to select) v
Lease payments
Return of depost
(Click to select) V
(Click to select) v
Present value of cash
outflows
2.
Which alternative should the company accept based on the calculations In part (1)?
O Lease of cars
O Purchase of fleet
>>>>
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