Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision [L013-2] The
ID: 2328348 • Letter: P
Question
Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision [L013-2] The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and shortly. To provide a replacement fleet, the company is considering two alterngtives: Purchase alternative: 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 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 $17,000 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 S 3,000 S 1,500 S 4,000 S 6,000 At the end of three years, the fleet coold 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 $55,000 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 $10,000 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%. Click here to view Exhibit 138-1 and Exhibit 138-2, 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? Complete this question by entering your answers in the tabs below.Explanation / Answer
RITEWAY AD AGENCY: [LEASING] 0 1 2 3 Purchase cost of the fleet (17000*10) -170000 Cost of servicing, taxes etc., -3000 -3000 -3000 Rapairs -1500 -4000 -6000 Sale price (EOY-3) 85000 Yearly net cash flows -170000 -4500 -7000 76000 PVIF at 18% 1 0.847 0.718 0.609 PV at 18% -170000 -3812 -5026 46284 NPV -132554 Security deposit & refund -10000 10000 Lease rent -55000 -55000 -55000 Yearly net cash flows -10000 -55000 -55000 -45000 PVIF at 18% 1 0.847 0.718 0.609 PV at 18% -10000 -46585 -39490 -27405 NPV -123480 LEASING ALTERNATIVE. [As the NPV (-) of the Leasing option is lower]