Alex Hartona wants to buy a taxi plate in the inner Melbourne suburb of South Yarra. Taxi registration plates (which confer the right to own and operate a taxi) are limited in supply and, hence, cost a great deal. Alex finds a plate for sale at $500 000. A new vehicle fitted with radio, phone and meter will cost $50 000. He reckons on driving the cab himself for up to 12 hours a day, and maybe hiring a driver to drive it for another 6-8 hours each day. He thinks he can net $150.000 each year after all cash costs are paid. After five years of this high workload, he aims to sell the cab and plate. To be conservative, he allows only $100 000 as the amount recouped.
a. What is the PP for the taxi venture?
b. If Alex allows $80 000 as his own driver's wage in his calculations, and he could earn 8 per cent elsewhere on his funds, what is the NPV for the project?
c. In your own words, what does this NPV tell us?
d. What are the IRRs (i) with no wage allowance for himself and (ii) after allowing for the wage?