4-5 FULL ANSWERS

Problem 12-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision [LO12-2] 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 considening 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 $26,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: At the end of three years, the fleet could be sold for one-haif of the original purchase price. Lease alternotive: The company can lease the cars under a three-year lease contract. The lease cost would be $61,000 per year (the first payment due at the end of Year 1 As part of this tease cost, the owner would provide all servicing and repairs, license the cars. and pay all the taxes. Riteway would be required to make a $10.500 security deposit at the beginning of the lease penod, 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 20K. Click here to view Exhipit 128-1 and Exhibir 128-2. to determine the approprtate discount factor(s) using tables. Requlred: 1. What is the net pretent value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cosh flows associated with the lease alternative? 3. Which alternative chould the company accept? Complete this guestion by entering your answers in the tabs below. What is the net present value of the cash fiows associated with the purchase alternative? (Enter negative amount with in miniss sign. Round your final answer to the ficarest whole dollar amoant.) 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 shorty. To provide of replacement fleet, the company 15 considering two alternatives: Purchese 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 $26.000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Al the end of three years, the fleet could be sold for onehaif of the ofiginal purchase price. Lease alternative: The company can lease the cars under a threeyear lease contract. The lease cost would be $61,000 per year (the first payment due at the end of Year 1) As part of this lease cost, the owner would provide ail servicing and repairs. license the cars. and pay all the taxes. Riteway would be requitred to make a $10,500 securty 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 retum is 20%. Clickhere to vew Exhibiti28s and Exhibiti28i2 to determine the appropriate discount foctoris) 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 fows associated with the lease alternative? 3. Which alternatve shouid the company accept? Complete this question by entering your answers in the tabs below. What is the net present value of the casti fows associated with the leasse alternative? (Enter negative amount with a enanuie sign. Round your final answer to the nearest whole dolfar arnount:) Exercise 12-6 (Algo) Simple Rate of Return Method [LO12-6] The management of Ballard MicroBrew is considenng the purchase of an automated bottling machine for $43,000. The machine would reploce an old plece of equipment that costs $11,000 peryear to operate The new machine would cost $5,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $18.000. The new machine would have a useful iffe of 10 years with no salvage value. Required: 1. What ts the annual depreclation expense assoclated with the new botting machine? 2. What is the annual incremental net operauing income provided by the new botiling machine? 3. What is the amount of the intial investment associated with this project that shouid be used for caiculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place le. 0.123 should be considered os 12.3% )