Question

Calculations must be done in Excel

As the financial advisor to Upmarket Car Rentals you are evaluating the following types of cars to add to the fleet: -

Speedster: - A sporty convertible with a cost of $120,000 and a useful life of 4 years. It will produce rental income of $80,000 per year and operating costs of $15,000 per year. A major service is required after 2 years costing $20,000. A salvage value of $30,000 is expected after 4 years. The required return is 8%.

Cruncher: - A rugged off-road vehicle costing $180,000 but with an expected useful life of only 2 years, due to the harsh conditions. It will produce rental income of $150,000 per year and operating costs of $20,000 per year. A major service is required after 1 years costing $30,000. A salvage value of $45,000 is expected after 2 years. The required rate of return is 10%.

Income tax can be ignored.

Required

1. The NPV’s of the two cars.
2. An analysis of the two cars assuming they are mutually exclusive and can be repeated indefinitely.

Please provide both the Excel calculation + explanation of how the answer was derived. Thank you.

Answer 1

NPV computation

Speedster

Cost	120,000.00
Useful life	4 years
Rental income	80,000.00
Operating costs	15,000.00
Service cost after 2 years	20,000.00
Salvage value	30,000.00

Cashflow table

Year	0	1	2	3	4
Initial cost	(120,000.00)
Total Initial cashflows	(120,000.00)
Rental income		80,000.00	80,000.00	80,000.00	80,000.00
Less : Operating costs		15,000.00	15,000.00	15,000.00	15,000.00
Less : Service at the end of 2 years			20,000.00
Total operating cashflows		65,000.00	45,000.00	65,000.00	65,000.00
Terminal cashflows
Salvage value					30,000.00
Net cashflows (Initial + Operating + Terminal)	(120,000.00)	65,000.00	45,000.00	65,000.00	95,000.00
PV factor @ 8% ---> 1/ (1+8%)^nth year	1.00	0.93	0.86	0.79	0.74
PV of cashflows (Net cashflows x PV factor)	(120,000.00)	60,185.19	38,580.25	51,599.10	69,827.84
NPV ---> Sum of PV of cashflows	100,192.36

Cruncher

Cost	180,000.00
Useful life	2 years
Rental income	150,000.00
Operating costs	20,000.00
Service cost after 1 years	30,000.00
Salvage value	45,000.00

Cashflow table

Year	0	1	2
Initial cost	(180,000.00)
Total Initial cashflows	(180,000.00)
Rental income		150,000.00	150,000.00
Less : Operating costs		20,000.00	20,000.00
Less : Service at the end of 1 year		30,000.00
Total operating cashflows		100,000.00	130,000.00
Terminal cashflows
Salvage value			45,000.00
Net cashflows (Initial + Operating + Terminal)	(180,000.00)	100,000.00	175,000.00
PV factor @ 10% ---> 1/ (1+10%)^nth year	1.00	0.91	0.83
PV of cashflows (Net cashflows x PV factor)	(180,000.00)	90,909.09	144,628.10
NPV ---> Sum of PV of cashflows	55,537.19

Unable to provide the complete answer on account of space constraint. Please let me know if you need the googledrive lnk with the complete answer spreadsheet.

Hope this helps you answer the question. Please provide your feedback or rating on the answer.

Thanks