The Riteway Ad Agency provides cars for its sales staff. In thepast, the company has always purchased its cars from a dealer andthen sold the cars after three years of use. The companyâs presentfleet of cars is three years old and will be sold very shortly. Toprovide a replacement fleet, the company is considering twoalternatives:
Purchase alternative: The company canpurchase the cars, as in the past, and sell the cars after threeyears of use. Ten cars will be needed, which can be purchased at adiscounted price of $27,000 each. If this alternative is accepted,the following costs will be incurred on the fleet as a whole:
Annual cost ofservicing, taxes, and licensing $ 4,300 Repairs, firstyear $ 2,200 Repairs, secondyear $ 4,700 Repairs, thirdyear $ 6,700
At the end of three years, the fleet could be sold for one-halfof the original purchase price.
Lease alternative: The company canlease the cars under a three-year lease contract. The lease costwould be $62,000 per year (the first payment due at the end of Year1). As part of this lease cost, the owner would provide allservicing and repairs, license the cars, and pay all the taxes.Riteway would be required to make a $11,000 security deposit at thebeginning of the lease period, which would be refunded when thecars were returned to the owner at the end of the leasecontract.
Riteway Ad Agencyâs requiredrate of return is 15%.
Required: 1. Use the total-cost approach to determine the present value ofthe cash flows associated with each alternative
2. Which alternative should thecompany accept?
The Riteway Ad Agency provides cars for its sales staff. In thepast, the company has always purchased its cars from a dealer andthen sold the cars after three years of use. The companyâs presentfleet of cars is three years old and will be sold very shortly. Toprovide a replacement fleet, the company is considering twoalternatives: |
Purchase alternative: The company canpurchase the cars, as in the past, and sell the cars after threeyears of use. Ten cars will be needed, which can be purchased at adiscounted price of $27,000 each. If this alternative is accepted,the following costs will be incurred on the fleet as a whole: |
| Annual cost ofservicing, taxes, and licensing | $ | 4,300 |
| Repairs, firstyear | $ | 2,200 |
| Repairs, secondyear | $ | 4,700 |
| Repairs, thirdyear | $ | 6,700 |
At the end of three years, the fleet could be sold for one-halfof the original purchase price. |
Lease alternative: The company canlease the cars under a three-year lease contract. The lease costwould be $62,000 per year (the first payment due at the end of Year1). As part of this lease cost, the owner would provide allservicing and repairs, license the cars, and pay all the taxes.Riteway would be required to make a $11,000 security deposit at thebeginning of the lease period, which would be refunded when thecars were returned to the owner at the end of the leasecontract. |
| Riteway Ad Agencyâs requiredrate of return is 15%. |
| Required: | |||
| 1. | Use the total-cost approach to determine the present value ofthe cash flows associated with each alternative
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Related questions
The Riteway Ad Agency provides cars for its sales staff. In thepast, the company has always purchased its cars from a dealer andthen sold the cars after three years of use. The companyâs presentfleet of cars is three years old and will be sold very shortly. Toprovide a replacement fleet, the company is considering twoalternatives: |
Purchase alternative: The company canpurchase the cars, as in the past, and sell the cars after threeyears of use. Ten cars will be needed, which can be purchased at adiscounted price of $17,000 each. If this alternative is accepted,the following costs will be incurred on the fleet as a whole: |
| Annual cost ofservicing, taxes, and licensing | $ | 5,000 |
| Repairs, firstyear | $ | 2,900 |
| Repairs, secondyear | $ | 5,400 |
| Repairs, thirdyear | $ | 7,400 |
At the end of three years, the fleet could be sold for one-halfof the original purchase price. |
Lease alternative: The company canlease the cars under a three-year lease contract. The lease costwould be $69,000 per year (the first payment due at the end of Year1). As part of this lease cost, the owner would provide allservicing and repairs, license the cars, and pay all the taxes.Riteway would be required to make a $14,500 security deposit at thebeginning of the lease period, which would be refunded when thecars were returned to the owner at the end of the leasecontract. |
| Riteway Ad Agencyâs requiredrate of return is 19%. |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |
| 1. | Use the total-cost approach to determine the present value ofthe cash flows associated with each alternative. (Any cashoutflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places.) |
| 2. | Which alternative should thecompany accept? | ||||
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The Riteway Ad Agency provides cars for its sales staff. In thepast, the company has always purchased its cars from a dealer andthen sold the cars after three years of use. The companyâs presentfleet of cars is three years old and will be sold very shortly. Toprovide a replacement fleet, the company is considering twoalternatives: |
Purchase alternative: The company canpurchase the cars, as in the past, and sell the cars after threeyears of use. Ten cars will be needed, which can be purchased at adiscounted price of $20,000 each. If this alternative is accepted,the following costs will be incurred on the fleet as a whole: |
| Annual cost ofservicing, taxes, and licensing | $ | 3,600 |
| Repairs, firstyear | $ | 1,500 |
| Repairs, secondyear | $ | 4,000 |
| Repairs, thirdyear | $ | 6,000 |
At the end of three years, the fleet could be sold for one-halfof the original purchase price. |
Lease alternative: The company canlease the cars under a three-year lease contract. The lease costwould be $55,000 per year (the first payment due at the end of Year1). As part of this lease cost, the owner would provide allservicing and repairs, license the cars, and pay all the taxes.Riteway would be required to make a $13,000 security deposit at thebeginning of the lease period, which would be refunded when thecars were returned to the owner at the end of the leasecontract. |
| Riteway Ad Agencyâs requiredrate of return is 19%. |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |
| 1. | Use the total-cost approach to determine the present value ofthe cash flows associated with each alternative. (Any cashoutflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places.) |
| PLEASE ANSWER ALL PARTS IN ORDER TO RECIEVE A REVIEW, THANKYOU. The Riteway Ad Agency provides cars for its sales staff. In thepast, the company has always purchased its cars from a dealer andthen sold the cars after three years of use. The companyâs presentfleet of cars is three years old and will be sold very shortly. Toprovide a replacement fleet, the company is considering twoalternatives: |
Purchase alternative: The company canpurchase the cars, as in the past, and sell the cars after threeyears of use. Ten cars will be needed, which can be purchased at adiscounted price of $16,000 each. If this alternative is accepted,the following costs will be incurred on the fleet as a whole: |
| Annual cost ofservicing, taxes, and licensing | $ | 3,200 |
| Repairs, firstyear | $ | 1,100 |
| Repairs, secondyear | $ | 3,600 |
| Repairs, thirdyear | $ | 5,600 |
At the end of three years, the fleet could be sold for one-halfof the original purchase price. |
Lease alternative: The company canlease the cars under a three-year lease contract. The lease costwould be $51,000 per year (the first payment due at the end of Year1). As part of this lease cost, the owner would provide allservicing and repairs, license the cars, and pay all the taxes.Riteway would be required to make a $11,000 security deposit at thebeginning of the lease period, which would be refunded when thecars were returned to the owner at the end of the leasecontract. |
| Riteway Ad Agencyâs requiredrate of return is 14%. |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. | Use the total-cost approach to determine the present value ofthe cash flows associated with each alternative. (Any cashoutflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places.) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 2. | Which alternative should thecompany accept? | ||||
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