Question
Bobby Jones, the club pro at Pebble Beach Golf Club, is considering replacing his fleet of golf carts. He bought the existing fleet of 100
Bobby Jones, the club pro at Pebble Beach Golf Club, is considering replacing his fleet of golf carts. He bought the existing fleet of 100 EZ-GO carts two years ago for $2,000 per cart. He is considering replacing them with a new model Club Car. Each Club Car has a GPS, a cooler, and a ball/club cleaner. Each Club Car costs $3,000. The old carts could be sold for $750 each. The carts are in Class 43 with a 30% depreciation rate. If Jones buys the new Club Cars, then he will keep them for three years and he expects to be able to sell them for $1,500 per cart. If Jones keeps the EZ-GO carts, then he expects that he could sell them for $250 per cart in three years. If Jones replaces the carts, then he expects incremental EBITDA of $54,000 per annum. One advantage of buying the new carts is that Bobby figures his spare-parts inventory will drop by $25,000. What is free cash flow in the terminal year (three years after replacement)? Assume that the tax rate is 35% and Jones cost of capital is 10%. (Round your answer to the nearest dollar.)
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