8 NPV and APV Zoso is a rental car company that is considering whether to add 25...
Question:
8 NPV and APV Zoso is a rental car company that is considering whether to add 25 cars to its fleet. The company depreciates all its rental cars using 20 per cent reducing balance, and at the end of five years assumes that the cars will be sold at residual value. The new cars are expected to generate £120,000 per year in earnings before taxes and depreciation for five years. The company is financed entirely by equity and has a 18 per cent tax rate. The required return on the company’s unlevered equity is 10 per cent, and the new fleet will not change the risk of the company.
(a) What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company?
(b) Suppose the company can purchase the fleet of cars for £375,000. Additionally, assume the company can issue £250,000 of five-year, 8 per cent debt to finance the project. All principal will be repaid in one balloon payment at the end of the fifth year. What is the adjusted present value (APV) of the project?
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