Final answer:
To calculate the NPV of the cash flows associated with the purchase and lease alternatives, we need to determine the present value of each cash flow and subtract the initial costs. The purchase alternative involves purchasing cars, incurring annual costs, and selling the cars after three years. The lease alternative involves leasing cars, making annual lease payments, and receiving a security deposit refund at the end of the lease.
Step-by-step explanation:
To calculate the net present value (NPV) of the cash flows associated with the purchase alternative, we need to determine the present value of the cash flows and subtract the initial cost. The annual cash flows consist of the cost of servicing, taxes, and licensing, as well as the repair costs for each year. Additionally, at the end of three years, the fleet can be sold for half of the original purchase price. We can use the appropriate discount factors from the provided tables to calculate the present value of each cash flow. After calculating all the present values, we sum them up and subtract the initial cost of purchasing the ten cars. The resulting value will be the NPV of the purchase alternative.
To calculate the NPV of the cash flows associated with the lease alternative, we need to determine the present value of the lease payments and subtract the security deposit. The annual lease cost is $72,000, and the security deposit is $16,000. The owner provides all servicing, repairs, taxes, and licensing, so there are no additional costs. Using the appropriate discount factors from the provided tables, we calculate the present value of the lease payments for three years. We then subtract the security deposit from the present value to obtain the NPV of the lease alternative.
After calculating the NPV for both alternatives, we compare the values. If the NPV is positive, it means that the alternative is expected to generate a positive return and should be accepted. If the NPV is negative, the alternative is expected to result in a negative return and should be rejected. Comparing the NPVs of the purchase and lease alternatives will help determine which alternative the company should accept.