The Riteway Ad Agency provides cars for its sales staff. Its present fleet of cars is...
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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 $17,000 each. If this alternative is chosen, the entire fleet will incur the following costs: Annual cost of servicing, taxes, and licensing Repairs, first year Repairs, second year $ 5,000 $ 2,900 $ 5,400 $ 7,400 Repairs, third year 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 $69,000 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 $14,500 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 19%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 3. Which alternative should the company accept? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the lease alternative's net present value. Note: Enter negative amount with a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount. Net present value $ (401,600) > Required 1 Required 3 Show less 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 $17,000 each. If this alternative is chosen, the entire fleet will incur the following costs: Annual cost of servicing, taxes, and licensing Repairs, first year Repairs, second year $ 5,000 $ 2,900 $ 5,400 $ 7,400 Repairs, third year 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 $69,000 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 $14,500 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 19%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the purchase alternative's net present value. 2. What is the lease alternative's net present value. 3. Which alternative should the company accept? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the lease alternative's net present value. Note: Enter negative amount with a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount. Net present value $ (401,600) > Required 1 Required 3 Show less
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To calculate the net present value NPV for each alternative we need to discount all cash flows to th... View the full answer
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