Question

Pete Castillio, the owner-manager of Cab Company, is considering purchasing a new all-electric unit for his taxi fleet. Pete has been focusing on upgrading from his current reliable fleet of hybrid vehicles to fully plug-in electric vehicles as he believes the reduced maintenance and increased reliability of these vehicles is a worthwhile venture.

The electric automobile would cost $50,000 (CCA class 16 - 40%) and would have a salvage value of $2,500 as the current unit at the end of the fifth year. Based on his previous experience, he projects daily revenues of $375 from this new taxi unit and average operating costs of $4,600 per month for incremental fuel and maintenance expenses and $65,000 per year for a driver salary.

Kamloops Cab Company maintains an average marginal tax rate of 35% and Pete expects a minimum after-tax return of 15% on his taxi investments.

Required – submit your handwritten response via the assignment moodle dropbox to the following:

1) Compute the net present value of this investment. Show all details of your calculations.  

2) Discuss any additional quantitative and/or qualitative issues of your analysis.

Answer 1

NET CASH OUTFLOWS= $50000

NET CASH INFLOW AFTER TAX BUT BEFORE DEPRICIATION

ASSUMING DEPRECIATION IS ON SLM BASIS P.A

DEP.=(50000/5)=10000 . ASSUMINF 1 YEAR =365 DAYS

THEN NET CASH INFLOW =$375*365*5-$4600*12M*5YEAR-$65000*5=$83375-DEP.$10000*5(1-tax0.35)+DEP.50000=71693.75$

DISCOUNTING FACTOR=15%

Present value =71693.75$*3.352(annuity metho, discountingrate 15%,year 5)=240328.56$

present value of salvage=$2500*.4971(Discounting factor of the 5th year)=1242.75$

Net cash flow =240328.56$+1242.75$=241571.31=241571.31$

NPV=$50000-241571.31$=191571.31$

(ADVISE:-IT SHOULD NOT BE ACCEPTE THE PROJECT.)

OR

NET OUTFLOW=50000+4600*12*5+65000*5=651000$

NET INFLOW=375*365*5-50000=634375(1-.35)=412343.75+50000=462343.75$*3.352=1549848$+2500*.497=1551090$

NPV=1551090$-651000$=900090$( IN THIS PROJECT SHOULD BE ACCEPTED)