Question

# Pete Castillio, the owner-manager of Cab Company, is considering purchasing a new all-electric unit for his...

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.

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)

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