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The Wrongway 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 eet of cars is three years old and will be sold very shortly. To provide a replacement fleet. the company is considering two alternatives as follows: Purchase Alternative. The company can purchase the cars, 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 $23,800 each. If this alternative is accepted, the following costs will be incurred on the eet as a whole: Annual cost of servicing, taxes, and . . $5,200 licensing Repairs, year 1 2,050 Repairs, year 2 5,625 Repairs, year 3 6,800 At the end of three years, the fleet could be sold for onehalf ofthe original purchase price. Lease Alternative. The company can lease the cars under a threesyear lease contract. The lease cost would be $75,500 per year (with the first payment due at the end of year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars. and pay all the taxes. Wrongway would be required to make a $23,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end ofthe lease contract. Wrongway's required rate of return is 18%. At the end of three years, the fleet could be sold for onehalf of the original purchase price. Lease Alternative. The company can lease the cars under a threeyear lease contract. The lease cost would be $75,500 per year [with the first payment due at the end of year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars. and pay all the taxes. Wrongway would be required to make a $23,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Wrongway's required rate of return is 18%. Click here to view Exhibit 1071 and Exhibit 1072. to determine the appropriate discount factor{s) using tables. 1. Use the total cost approach to determine the present value of the cash ows associated with each alternative. [Negative amounts should be indicated with a minus sign. Round discount factor{s) to 3 decimal places. Round other intermediate calculations and final answers to the nearest whole dollar amounts.) 2. Which alternative should the company accept based on the calculations in part (1)? 0 Purchase of fleet O Lease of cars 1. Use the total cost approach to determine the present value of the cash ows associated with each alternative. [Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal places. Round other intermediate calculations and final answers to the nearest whole dollar amounts.) Present Amount of 18% Value of Item Year{s) Cash Flows Factor Cash Flows Purchase of fleet: Initial payment cars {Click to select) v $ $ Annual cost of servicing, . . Cl' kt | ct taxesandllcenslng I I0 0599 Iv Repairs 7 Year 1 (Click to select) v Repairs Year 2 {Click to select) v Repairs Year 3 {Click to select) v Resale value of the fleet {Click to select) v Present value of cash $ outflows Lease of cars: Initial deposit {Click to select) v $ $ Lease payments {Click to select) v Return of deposit {Click to select) v Present value of cash $ outflows

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