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Exotic Rentals has four independent projects under consideration, each with a required rate of return of...

Exotic Rentals has four independent projects under consideration, each with a required rate of return of 14%. The total projects budget is $800,000. A table showing the investments and projected free cash flows follow:

Project/Year Maserati Lamborghini Ferrari BMW i8 Coupe
0 (investment) $150,380 $221,320 $286,550 $175,500
1 $40,000 $85,000 $100,000 $52,000
2 $80,000 $110,000 $125,000 $90,000
3 $60,000 $110,000 $125,000 $90,000
4 $60,000 $92,000 $125,000 $70,000
5 $95,000 $125,000 $150,000 $135,000

No additional cash flows are expected from any of the five projects after year 5. The year 5 cash flow includes rentals and auction of the exotic vehicles into the secondary car market.

1- Which of the 4 projects has the highest IRR? The correct answer was determined using an Excel spreadsheet. Take answer to at least two decimal positions.

a) Ferrari

b) BMW i8 Coupe

c) Maserati

d) Lamborghini

2- Continuing with Exotic Rentals, the company has sufficient capital budget to fund three out of the four projects. Assuming that they do, what three projects should the firm select? Use highest NPV's to determine the projects to select.

a) BMW i8 Coupe, Maserati, Lamborghini

b) Ferrara, BMW i8 Coupe, Maserati

c) Lamborghini, Ferrari, BMW i8 Coupe

d) Maserati, Lamborghini, Ferrari

3- Continuing with Exotic Rentals, what is the combined NPV of these two projects: BMW i8 Coupe and Maserati

a) $448,464

b) $325,800

c) $509,182

d) $384,759

e) $183,302

4- Continuing with Exotic Rentals, what is the combined IRR of these two projects: Lamborghini and Ferrari?

a) 32.94%

b) 33.24%

c) 30.92%

d) 66.47%

e) 35.55%

5- Concluding Exotic Rentals, firm management is considering a loan to supplement the $800,000 set aside for the vehicles. The size of the loan would be approximately $34,000 and the interest rate would be 11.25%. Should Exotic Rentals take out the loan and fund all four projects? Base you decision only on the financial aspects of the deal.

a) No

b) Insufficient information to make a decision

c) Yes

Solutions

Expert Solution

Use IRR function in EXCEL to find the IRR

=IRR(Year0 to Year5 cashflows)

Use NPV function in EXCEL

=NPV(rate,Year1 to year5 cashflows)-Year0 cashflow

rate=14%

required return 14%
Maserati Lamborghini Ferrari BMW i8 Coupe
Year0 -150380 -221320 -286550 -175500
Year1 40000 85000 100000 52000
Year2 80000 110000 125000 90000
Year3 60000 110000 125000 90000
Year4 60000 92000 125000 70000
Year5 95000 125000 150000 135000
NPV 71628.25 131522.17 133639.51 111673.94
IRR 30.51% 35.55% 30.92% 35.05%

1. Lamborghini will have higher IRR

2. Option C is correct

Lamborghini, Ferrari, BMW i8 Coupe have higher NPV's

3. Combined NPV of BMW i8 Coupe and Maserati=71628.15+111673.94=183302.19

Option e is correct

4. Combined Lamborghini and Ferrari IRR=35.55%+30.92%=66.47%

option d is correct

5. Option c, Yes.

They can fund beacuse the interest rate is lower than both cost of capital of 14% and IRR5's of all the projects.

jeff jeffy answered 2 years ago
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