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: what is the net present value of the cash flows assocaited with the purchase alternatives

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