Problem 11-21A Using the data in P11-21A on page 544 (little page numbers) of yo
ID: 2586749 • Letter: P
Question
Problem 11-21A
Using the data in P11-21A on page 544 (little page numbers) of your textbook do a NPV analysis using the Total Cost Approach.
Do an Incremental Cost Approach analysis also below your total cost approach analysis. The total cost approach and the incremental cost approach should both be on the same page.
I already did the total cost approach but had trouble with incremental cost approach.
Assignments -- Fall x My Gredes - Fall 2 x Ha My Grades - Fall 2 x & My Drive - Google x C Chegg Study | Gui x C Problem 11-21A Lx C Problem 11-214, L X * - e Secure | https://drive.google.com/drive/u/0/my-drive ALEX - O X Q* 08 : 544 Chapter || PROBLEM II-21A Net Present Value Analysis of a Lease or Buy Decision [LO-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 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 $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 ... $3,000 $1,500 $4,000 $6,000 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 $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%. 8:37 PM = O Type here to search o o a * O H O 9 D D V : * 0 A 33 w n q o la « 1214/2017 5Explanation / Answer
Solution:
Note: Alternatively calculation can be reversed by taking benefit of Leasing Options as positive figure & taking lease rentals & Resale Value as Negative figure.
The Rightway Ad Agency Total Cost Approach Net present value calculations Particulars Year Cash Flows Present Value Factor @ 18% Present Value Lease Alternative Deposit paid 0 -10000 1 -10000 Annual Lease Payments 1-3 -55000 2.174 -119585 Refund of Deposit 3 10000 0.609 6086 Net present value of Cash Outflows -123499 Purchase Alternative Cost of Car 0 -170000 1 -170000 Annual Cost of Servicing, taxes & Licensing,etc 1-3 -3000 2.174 -6523 Repairs, Year 1 1 -1500 0.847 -1271 Repairs, Year 2 2 -4000 0.718 -2873 Repairs, Year 3 3 -6000 0.609 -3652 Resale Value of Cars 3 85000 0.609 51734 Net present value of Cash Outflows -132585 Favouable NPV while selecting Lease option 9086 Leasing option is favourable as NPV of Outflows is Less in Leasing in comparison with Purchase Option