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AAA Car Rentals are considering a purchase of new electric vehicles for its fleet. Each EV will cost $35,000 and they plan to buy 100
AAA Car Rentals are considering a purchase of new electric vehicles for its fleet. Each EV will cost $35,000 and they plan to buy 100 vehicles. Each EV can be used for up to 5 years, but after 4 years, AAA plans to sell the EVs to used car dealers for $23,000. The EVs are going to be depreciated using MACRS (see below). Each EV provides oerational savings of $4,000 per year. AAA WACC is 12% and it's in the 20% tax bracket. | |||||||
Years of use | 1 | 2 | 3 | 4 | 5 | ||
Salvage value | $ 29,000.00 | $ 27,500.00 | $ 25,500.00 | $ 23,000.00 | $ 20,000.00 | ||
Depreciation | 25% | 40% | 20% | 10% | 5% | ||
Book value $35,000 | |||||||
a. What is the economic life of an EV? For how many years should AAA Car Rentals use its EVs? | |||||||
b. The future conditions in the used EV market are uncertain. The salvage value may either fall by 20% or increase by 20% of the values in the table above. Conduct the sensitivity analysis. How do your answers to part a change? | |||||||
c. Conduct the Monte Carlo simulation. Roll a 6-sided die 10 times. Record the results. If the number rolled is 1-3, the salvage values will fall 20%. If the number rolled is 4-6, the salvage values will rise 20%. What is the projects ENPV and std deviation of NPV? Assume that the EVs are going to be used for 4 years. |
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