Question
all equity rental car company is trying to determine whether to add cars to its fleet. the firm fully depreciates all its rentals cars over
all equity rental car company is trying to determine whether to add cars to its fleet. the firm fully depreciates all its rentals cars over five using the straight-line method. the new cars are expected to generate $140,000 per year in earnings befor taxes and depreciation for five years. the company can purchase the fleet of the cars for 395,000. The company has a 35 percent tax rate. the required return of the firm's unlevered equity is 13 percent, and the new fleet will not change the risk of the company.
Assume that out of 395,000 cost of the fleet, 260,000 will be financed with five years debt. The pre-tax cost of debt is 8 percent. . Interest will be paid but all principles will be repaid in one ballon payment at the end of the fifth year. what is the adjusted present value of the project (APV)? ignore the flotation of the debt issue . Also, ignore bankruptcy cost, transaction cost, signaling, , incentive, , and other effects.
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