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 companys 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 $ 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 $

At the end of three years, the fleet could be sold for onehalf of the original purchase price.

Lease alternative: The company can lease the cars under a threeyear lease contract. The lease cost would be $ per year the first payment due at the end of Year 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 $ 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 Agencys required rate of return is

Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.

Required:

What is the net present value of the cash flows associated with the purchase alternative?

What is the net present value of the cash flows associated with the lease alternative?

Which alternative should the company accept?

Answer rating: 100% (QA)

1 To calculate the net present value NPV of the cash flows associated with the purchase alternative ... View the full answer