Blinko Products wants an airplane for use by its corporatestaff. The airplane that the company wishes to acquire, a ZephyrII, can be either purchased or leased from the manufacturer. Thecompany has made the following evaluation of the twoalternatives:
Purchase alternative. If the Zephyr II is purchased,then the costs incurred by the company would be as follows:
Purchase cost of theplane $ 800,000 Annual cost ofservicing, licenses, and taxes $ 5,000 Repairs: Firstthree years, per year $ 3,000 Fourthyear $ 5,000 Fifthyear $ 10,000
The plane would be sold after five years. Based on currentresale values, the company would be able to sell it for aboutone-half of its original cost at the end of the five-yearperiod.
Lease alternative. If the Zephyr II is leased, then thecompany would have to make an immediate deposit of $46,000 to coverany damage during use. The lease would run for five years, at theend of which time the deposit would be refunded. The lease wouldrequire an annual rental payment of $120,000 (the first payment isdue at the end of Year 1). As part of this lease cost, themanufacturer would provide all servicing and repairs, license theplane, and pay all taxes. At the end of the five-year period, theplane would revert to the manufacturer, as owner.
Blinko Productsâ required rateof return is 10%. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.
Required: 1a. Use the total-cost approach to determine the present value ofthe cash flows associated with purchase alternative.(Negative amount should be indicated by a minus sign. Rounddiscount factor(s) to 3 decimal places, intermediate and finalanswers to the nearest dollar amount. Omit the "$" sign in yourresponse.)
Present value ofcash outflows with purchase alternative $
1b. Use the total-cost approach to determine the present value ofthe cash flows associated with lease alternative. (Negativeamount should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places, intermediate and final answers tothe nearest dollar amount. Omit the "$" sign in yourresponse.)
Present value ofcash outflows with lease alternative $
2. Which alternative should thecompany accept? Leasing alternative Purchasing alternative
Blinko Products wants an airplane for use by its corporatestaff. The airplane that the company wishes to acquire, a ZephyrII, can be either purchased or leased from the manufacturer. Thecompany has made the following evaluation of the twoalternatives: |
Purchase alternative. If the Zephyr II is purchased,then the costs incurred by the company would be as follows: |
| Purchase cost of theplane | $ | 800,000 |
| Annual cost ofservicing, licenses, and taxes | $ | 5,000 |
| Repairs: | ||
| Firstthree years, per year | $ | 3,000 |
| Fourthyear | $ | 5,000 |
| Fifthyear | $ | 10,000 |
The plane would be sold after five years. Based on currentresale values, the company would be able to sell it for aboutone-half of its original cost at the end of the five-yearperiod. |
Lease alternative. If the Zephyr II is leased, then thecompany would have to make an immediate deposit of $46,000 to coverany damage during use. The lease would run for five years, at theend of which time the deposit would be refunded. The lease wouldrequire an annual rental payment of $120,000 (the first payment isdue at the end of Year 1). As part of this lease cost, themanufacturer would provide all servicing and repairs, license theplane, and pay all taxes. At the end of the five-year period, theplane would revert to the manufacturer, as owner. |
| Blinko Productsâ required rateof return is 10%. (Ignore income taxes.) |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |
| 1a. | Use the total-cost approach to determine the present value ofthe cash flows associated with purchase alternative.(Negative amount should be indicated by a minus sign. Rounddiscount factor(s) to 3 decimal places, intermediate and finalanswers to the nearest dollar amount. Omit the "$" sign in yourresponse.) |
| Present value ofcash outflows with purchase alternative | $ |
| 1b. | Use the total-cost approach to determine the present value ofthe cash flows associated with lease alternative. (Negativeamount should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places, intermediate and final answers tothe nearest dollar amount. Omit the "$" sign in yourresponse.) |
| Present value ofcash outflows with lease alternative | $ |
| 2. | Which alternative should thecompany accept? | ||||
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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 $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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| 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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