1

The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a delivery service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end.

The firm is contemplating the following (base case):

Vehicle acquisition cost $ 48,000

Years of useful life (economic life) 1

Tax rate 25%

Required rate of return on equity11%

Required return ondebt6%

Debt ratio 40%

Annual revenues$ 175,000

Operating expenses (EXCLUDING depreciation)$ 115,000

1.Depreciate straight-line over the year of useful life, down to $0 over one year.

2. The maximum dividend is paid at year end.

3. Ignore any working capital effects.

4. Capital charge will be based on the assets at the beginning of each year.

P&L?

OCF analysis?

Economic Profit analysis?

What is the WACC?

What is the NPV of this investment? Should investment be considered?

What is the projects IRR?

Report how many dollars are distributed at year end to:

a. To debt holder: principal and interest

b. To tax authority

To shareholder

What is the shareholder's total rate of return?

Immediately after making the investment in this vehicle, find:

Enterprise Value

Enterprise value as a multiple of EBITDA

ROE

Operating margin

Times-interest-earned (TIE)