Problem $14-25($Algo$)$ Net Present Value Analysis of a Lease or Buy Decision $[$LO$14-2]$

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 $$31,000$ each. If this alternative is chosen, the entire fleet will incur the following costs:

Annual cost of servicing, taxes, and licensing $ $4,700$

Repairs, first year $ $2,600$

Repairs, second year $ $5,100$

Repairs, third year $ $7,100$

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 $$66,000$ per year $($the first payment due at the end of Year $1).$ As part of this lease agreement, the owner would provide all servicing and repairs, license the cars, and pay the taxes. Riteway would make a $$13,000$ 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 $16\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

What is the purchase alternative$$s net present value.

What is the lease alternative$$s net present value.

Which alternative should the company accept?