Question

The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $900,000. It expects to keep the autos for only two years and to sell them at the end of that period for 60 percent, on average, of what they cost. The plan is to generate $10,500 of incremental revenue per additional auto in each year of operation. The controller estimates that other costs will amount to 14 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 $10,000 in additional working capital. The firm is in a 30 percent tax bracket and uses 12 percent as a cost of capital.

Calculate the NPV. (Do not round the intermediate calculations. Round the final answer to the nearest whole dollar. Negative answer should be indicated by a minus sign. Omit $ sign in your response.)

NPV           $

Should Elite purchase the automobiles?

• Yes

• No

Answer 1

Calculation of Net present value given below.

Soloution 2 Total cau Mental = 30 Incremental Revenue = $10.500 per care per year cost = 30 x 40,000 x 14% = 1, 68,000 per year - Year o f ential outlay (9,00,000) cash inflow (10,500x30) (10500x30) 3,5,000 315000 - Total cast (168000) (168000) - Pre tan income Tan @ 30% 1,47,000 (44,100) 1,47,000 (44,100) less 102900 102900 W Investment in orking capital (10000) ( 1 return in we Sales of rental can cash flow after she $9,10 pood 102900 10000 540,000 (900.000 X 607) 652900

-Pv factor 0.7272 0.8928 - 012). Present Value 21875 5,20488 - NPV = outflow cash Inflow - Cash ___612 363 - 9,10,000 - -297637 NPV should is negative therefore not I purchase the Elite automobiles