Riverbend Case Study

Topics: Investment, Leasing, Net present value Pages: 3 (933 words) Published: February 2, 2010
With the big boom of the telecommunications industry within recent years, many telecom companies are looking for ways to expand their base and grab that incremental part of market share. The advancement of technology causes a greater consumer demand to fulfill the voids of older, less effective communication methods. Technology and growth are the means by which the telecom industry has been able to boom. Riverbend Telephone Company is one of those telecom organizations that is looking to broaden their market share in the telecom industry.

Riverbend Telephone Company is an independently owned telecom organization. It’s current market base is local but the challenge is to broaden its geographic coverage area. Customers in this local, and nearby, communities are able to receive telephone service from Riverbend. Recently, this geographic area has undergone aggressive growth. This growth is attributed to the construction of a new bridge between two small cities. With more access to this additional city, Riverbend is seeing a need for telephone service in this new area, and thus the opportunity to expand their market.

With the new area that needs to be served, Riverbend evaluated and concluded that it needed at least one new maintenance truck and an additional crew. The need to obtain a new truck presents opportunities for further analysis to determine if the truck should be purchased or leased and if one option is selected over the other, how will this decision affect future costs to Riverbend?

1) Should Riverbend buy or lease the truck?
In order to do a fair comparison of number, we need to calculate the present value of an annuity for leasing the vehicle. With an assumed discount rate of 10%, over the course of 5 years, we calculated a present value of $27,293. 76. So if we were to look at price alone, the present value for leasing a vehicle for 5 years at $7,200 a year would be $27,293.76 which is $2,993.76 more than if the company would...
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