Question

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 company's 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 purehase the car, 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 $19,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole $ 5,200 $ 3.100 $5,600 $7,600 Annual cost of servicing, taxes, and licensing Repairs, first year Repairs, second year Repairs, third year

Answer 1

Solution 1 & 2:

Computation of Present Value of Purchasing and Leasing option - Riteway Ad Agency
Particulars	Period	Amount	PV Factor	Present Value
Purchasing Option:
Purchase price of Car	0	-$190,000.00	1	-$190,000
Annual cost of Servicing, taxes and licensing	1-3	-$5,200.00	2.283	-$11,872
Repairs - Year 1	1	-$3,100.00	0.870	-$2,697
Repairs - Year 2	2	-$5,600.00	0.756	-$4,234
Repairs - Year 3	3	-$7,600.00	0.658	-$5,001
Sale Value of Car	3	$95,000.00	0.658	$62,510
Present Value of Buying Option (A)				-$151,293
Leasing Option:
Annual lease payment	1-3	-$71,000.00	2.283	-$162,093
Security deposit	0	-$15,500.00	1	-$15,500
Return of Security deposit	3	$15,500.00	0.658	$10,199
Present Value of Leasing Option (B)				-$167,394

Solution 3:

Company should accept Purchase option.