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fgiga [73]
3 years ago
10

The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer an

d 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: what is the net present value of the cash flows assocaited with the purchase alternatives
Business
1 answer:
Oksana_A [137]3 years ago
8 0

Answer:

NPV = -$149,319.44

Explanation:

Ten cars will be needed, which can be purchased at a discounted price of $18,000 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    $5,100
  • Repairs, first year                                                $3,000
  • Repairs, second year                                        $5,500
  • Repairs, third year                                                $7,500

the required rate of return or discount rate for Riteway is 20%.

Cash flows:

CF₀ = -$180,000

CF₁ = -($5,100 +$3,000) = -$8,100

CF₂ = -($5,100 + $5,500) = -$10,600

CF₃ = ($9,000 X 10) - ($5,100 + $7,500) = $90,000 - $12,600 = $77,400

using an excel spreadsheet, we can calculate the NPV with r = 20%

NPV = -$180,000 + $30,680.56 = -$149,319.44

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