--%>
Assignment Help - homework help

Problem on car rental plans

Ape Car Rental plans to begin its business by buying 10 cars at the average price of $18,000 each, depreciating them entirely over 5 years utilizing the straight-line method. It will rent space in a parking lot for $300 a month, paying the rent in advance every month. Ape expects that it will rent 5 cars on an average day, charging $40 per day per car. The maintenance cost for each car is $60 a month. After 5 years, Ape will sell the cars at 40% of the original value. Ape receives all income and pays all the bills, (apart from rent) at the end of each month, however it pays the taxes once a year. Its income tax rate is 25% and it will employ 12% as the discount rate. Suppose that there are 30 days in a month. Is it a valuable project for Ape?

E

Expert

Verified

Rent obtained = 5*$40*30*12 = 72000

Rent after tax = 54000

Parking space rent paid = 300*12 = 3600

Maintenance cost = 60*10*12 = 7200

Tax savings on expense = (3600+7200)*0.25 = 2700

1233_abc.jpg

The NPV is positive and high. Hence this is a worthwhile project for Ace.

   Related Questions in Corporate Finance

  • Q : Problem on financial manager

    Assume that you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production plant in China, so it needs to take a loan of US$1 million. Bank A offers Yuen Cheong

    		•
  • Q : Finance You expect KT industries (KTI)

    You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The value of a share of KTI's stock is clos

    		•
  • Q : Who wrote famous paper- distribution of

    Who wrote famous paper of on distribution of cotton price returns?

    		•
  • Q : Financial statements The concept of

    The concept of conservatism has been influential in the development of accounting theory and practice.  A major effect of conservatism is that accountants tend to recognize losses but not gains.  For example, when the value of an asset is impaired, it is wri

    		•
  • Q : Define Cash to cash cycle Cash to cash

    Cash to cash cycle: The concept of cash to cash cycle is financial performance standard, which is associated with the management of a firm’s working capital. The definition of cash to cash or cash conversion cycle is “the length of time a

    		•
  • Q : What repercussions do variations in

    What repercussions do variations in the oil price have on the value of a company?

    		•
  • Q : Valuation & Merger analysis Problem

    Problem 21-1 Valuation Harrison Corporation is interested in acquiring Van Buren Corporation. Assume t

    		•
  • Q : What are flow variables Flow variables

    Flow variables: Any variable, whose magnitude is evaluated over a time period, is termed as glow variable.

    		•
  • Q : Describe nominal gross domestic product

    Nominal gross domestic product: If GDP of a particular year is estimated on the base of price of similar year, it is termed as nominal GDP.

    		•
  • Q : Variance of a portfolio The variance of

    The variance of a portfolio of 40 stocks will be the addition of _______ variance terms and _______ covariance terms. A) 40; 1560B) 40; 1600C) 80; 40D) 1600; 40

    		•