A car renral coimpany is considering setting up a diviaion to poovide chauffeur deiven limousines for weddings and other events The proposed investment will indude the purchase of a fleet of 20 limoutines ar a cost of $200000 each. It is ertimared that the limousines will have a useful life of five years and a resale value of $30000 each as the end of their ueffal life. The compaay ues the straight line merhod of depreciation. Revense and variable costs Bach limousine will be hird to customers for $800per day. Thevariable cont, including fuel, cleaning and the chauffeurs wages, will be $300 per day. The limousines will be available for hire 350 dayt of the year. A market specialise was hired at a cost of $20000 to estimate the derand for the limeusines in Year 1 . The market upecialis estimated thar each limousine will be hired for 260 days in Year 1 and that the number of dxys' hitre will inciease by ten days each year for the temaining lofe of the project. Flued costs Each limousine will incur fixed costs, induding maintenance and depreciation, of $15000 a year. The adminitration of the division is expected to cost $300000 each year. The garaging of the flmousines will not require any additional iavestmeat ber. will utilite existing facilities for which there in no orher use. The head office will charge the division an annual foe of 10 por cor. of tales revenue for the use of these fricilities. Tration The companys financial dinector has provided the following traxadion informationt - Tia depreciations 25 per cent per anoum of the reducing balance, with a balancing adjuatment in the year of disposal, The timousines will be cligible for tax depreciation. - Traxion rate: 30 per cent of taxable protics. Half of the ax is payable in the year in which it arises, the balance is paid in the fallowiag year. Dcher lefonnation dyare inflation. The company uses a cost of capital of 12 per cent per annum to evaluane poojees of this type. Moquired (\$) Evaluate whecher the company should go ahead with the projeet. You should use ner prevent value as the basis of your eviarion. (I 14 riving) The company is alwo carrying oat a review of irs existing car rental burines. The company is deciding whecher is thould replace the ears that it user after one, two of three years. The cars will not be kept longer than three years due to the higher tisk of breikdowns. The eximatad relevant cath flows for the three possible options for each car ean be obtained from the following infocmaglan: \begin{tabular}{ccc} Year & Cashoutflows$ & Residealvalue5 \\ \hline 0 & (30000) & $15000 \\ 1 & (1500) & 21000 \\ 2 & (2700) & 15000 \\ -3 & (3600) & 9000 \end{tabular} The company uses a cost of eapital of 12 per cent for decisions of this type. Requiced (b) Calculate, using the annualixed equivalent method, whether the cass should be replaced after one, tho or throe years. You thould ignore exation and inflanion. ( 7 markit) (6). Explain the limitarions of the afinualized equivalent method for making decisions to replace nea-cuerent assers. (4 marias) (Tot 25 marks) A car renral company is considering setting up a division to poovide chauffeur daiven limousines for weddings and other evens The proposed invertment will include the purchase of a fleer of 20 linaousines ar a cost of $200000 each. It is ertimated that the limousines will have a useful life of five years and a resale value of $30000 each as the end of their toeful life. The company ues the straight line mechod of depreciation. Revease and variahle costs Each limousine will be hired to customers for $800 per day. The variable cont, including fuel, cleaning and the chaufieur's wages, will be $300 per day. The limousines will be available fot hire 350 days of the year. A marline specialise was hired at a cost of $20000 to estimate the dernand for the limousines in Year 1. The market ipecialist extimated that each limousine will be hired for 260 days in Year 1 and that the number of daya' hife will inerease by ten days each year for the temainiag lefe of the project. Hared costs Each limousine nill incue fixed costs, including maintenance and depteciation, of $15000 ayeaf. The administration of the division is expected to cost $300000 each year. The garaging of the limousines will not require any additional iavestmeat ber. will utilite existing ficilities for which there is no orher ase. The head office will charge ehe division an annul foe of 10 per cer. of tales revenae for the use of dhese facilities. Turatida The cempanyh financial disector has provided the following recalion informationt - Tix depreciation: 25 per cene per anoum of the reducing balance, with a balancing adjustment in the year of disposal, The timousines will be cligible for tax depreciation. - Tharion rate 30 per cent of taxable protirs. Half of the tax is payable in the year in which it arises, the balance as paid in the fallowieg yeas. Daher iafonnation lyate inflation. The company uset a cost of capital of 12 per cent per annum to evaluate projees of thin rype. Roquired: (2) Evaluare whether the company should go ahead with the project. You should use ner preient value as the basis of your evtuation. (14 mumkes) The company is alio carrying oat a review of irs existing car renral burines. The company is deciding whether ir thould replace de ears that it uses after one, two of three years. The ears will not be kept longer than throe years due to the higher hisk of breakdowns, The ctimated relevant cath flows fot the three possible options for each ear can be obtained from ehe following infocmations The company uses a cost of eapital of 12 per cent for decisioas of this type. Requiced (b) Calculate, using the annualixed equivalent method, whether the cars should be replaced after one, two or throe years, You thould ignore taxation and inflarion. (7 markis) (c). Explain-the liminarions of the aninaslined equivalent method for making decisions to replace nea-current assers