Question

The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $1,000,000. It expects to keep the autos for only two years and to sell them at the end of that period for 55 percent, on average, of what they cost. The plan is to generate $20,000 of incremental revenue per additional auto in each year of operation. The controller estimates that other costs will amount to 20 cents per kilometre on an average of 40,000 kilometres per car per year. She also estimates that the new business will require an investment of $15,000 in additional working capital. The firm is in a 30 percent tax bracket and uses 10 percent as a cost of capital. Calculate the NPV for the project

Hint: CCA = 40% and the final answer (NPV) is positive. Do not write the dollar sign in the answer box.

Numeric Response

Please provide corrcet answers. thanks.

Answer 1

NPV: 10,750

	0	1	2
Cost of asset	-1,000,000
Additional working capital	-15,000
Incremental revenue		600,000	600,000
Annual cost		240,000	240,000
Annual EBITDA		360,000	360,000
Depreciation expense		400,000	240,000
Operating cash flows after taxes		372,000	324,000
Recovery of working capital			15,000
After tax salvage proceeds			493,000
Total cash flows	-1,015,000	372,000	832,000
PV factor at 10 %	1.0000	0.9091	0.8264
Present Values	- 1,015,000	338,185.20	687,564.80
Net Present Value	10,750

Operating cash flows after taxes = EBITDA x 0.70 + Depreciation x 0.30

Year 1 OCFAT = 360,000 x 0.70 + 400,000 x 0.30 = 372,000

Year 2 OCFAT = 360,000 x 0.70 + ( 1,000,000 - 400,000 ) x 40 % x 0.30 = 324,000

Book value of asset at the end of Year 2 = 1,000,000 - 400,000 - 240,000 = 360,000

Gain on salvage = 1,000,000 x 55 % - 360,000 = 190,000

Tax on gain = 190,000 x 30 % = 57,000

After tax salvage proceeds = 550,000 - 57,000 = 493,000