3. Capital Budgeting Baltimore Rental Cars, Incorporated (BRC) is analyzing whether to enter the discount used rental car market. This project would involve the purchase of 100 used, late-model, mid-sized automobiles at the price of $9,000 each. To reduce their insurance costs, BRC will have a C14 1 Number of cars 2 Car price fx A B D E F G H 3 Total used cars 4 Lojack System 5 Total Initial Investment Loyola University Maryland Internal Use Only LoJack Stolen Vehicle Recovery System installed in each automobile at a cost of $1,000 per vehicle. BRC has operated a light truck rental business for the last ten years but has not earned any profits since four years ago. BRC has 50 trucks now, and if the company sells them to start the used rental car business, their salvage value is $1,000 per vehicle. BRC will utilize one of its abandoned lots to store the vehicles. If BRC does not undertake this project, they could sublease this lot to an auto repair company for $80,000 annually. BRC will pay the $20,000 annual maintenance costs on this lot, whether the lot is subleased or used for this project. In addition, if this project is undertaken, net working capital will increase by $50,000. The automobiles will qualify as a 3-year class asset under the modified accelerated cost recovery system (MACRS). Each car is expected to generate $5,500 in revenue annually and have operating costs of $1,000 annually. The life of the project is four years. At the end of 4 years, the estimated salvage value is $500 per vehicle. The discount rental car business is expected to have a minimum impact on BRC's regular rental car business, where the net cash flow is expected to fall by only $25,000 per year. BRC expects to have a marginal tax rate of 32%. The depreciation schedule of a 3-year class asset under the modified accelerated cost recovery system (MACRS) is as follows. L 6 Net Capital Spending 7 Revenue/car 8 Lot sublease 9 Operating costs/car 10 Working capital requirement 11 Cannivalization 12 13 Year 14 Revenue 15 Cannivalization 16 Opportunity costs 17 Operating costs 18 Depreciation 19 EBIT 20 Tax 21 Net income 22 OCF 23 24 25 OCF 26 NCS 27 Changes in NWC 28 PCF 29 30 31 Cost of capital 32 NPV 33 IRR 34 Year Percentage 1 33.33% 2 3 44.44% 14.82% 4 7.41% 35 Data Table 36 37 0.05 Based on the information, answer the following questions. 38 0.06 39 0.07 (1) Determine the free cash flows associated with the project and the project's net present value and internal rate of return. Assume that the required return of the project is 10%. 40 0.08 41 0.09 42 0.1 (2) Create the Data Table with the changing cost of capital. 43 0.11 44 0.12 (3) Calculate the break-even amount of revenue per car. Salvage value (old) After-tax salvage Salvage value (new) After-tax salvage 1 2 3 4