Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Braves Bus Tours wants to provide excursions to several national and international sports events that will be taking place throughout the country during the next

  • Braves Bus Tours wants to provide excursions to several national and international sports events that will be taking place throughout the country during the next few years. To make the buses more comfortable and the trips more popular, each of eight new buses will be equipped with a kitchen and a large video screen for movies and sports telecasts.

    Each bus costs $200,000 and requires customized equipment that costs an additional $100,000 per bus. All the buses and the equipment have a recovery period (MACRS life) of 5 years. An advertising campaign, which will start immediately, costs $750,000 and will be paid for immediately. Other start-up costs total $30,000.

    The sports trips are scheduled for 3-10 days and will generate revenues of $100 per day per seat. For the eight video buses, total revenues are expected to be $3,168,000 for the first year and $3,484800 for the second year (a 10% increase). Operating costs are 30% of total revenues. Personnel expenses, including driver salaries, are $650,000 in year 1 and will increase by 5% in year 2.

    The company expects to discontinue operation of its video bus tours after the second year. Each bus will be sold to a university for $35,000 ($30,000 for the bus itself and $5,000 for the equipment). The finance department has determined that the beta of this project is 1.5, while the market return is expected to be 14%. Treasury bills pay a nice safe 4 percent.

    Should the company proceed with this project? Demonstrate your decision by answering the following questions:

    • What are the cash flows for the initial investment period (CF0)?
    • What is the MACRS depreciation schedule for the first two years for all of the buses and the equipment? The fall into the MACRS 5 year class. See page 285 of the text.
    • What are the after-tax cash flows for the 2 years that the bus tours will be in operation if their tax rate is 34%?
    • What are the termination cash flows in year 2?
    • If NPV analysis is used, should the buses be purchased?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Institutions Management

Authors: Anthony Saunders

1st Edition

0256110565, 9780256110562

More Books

Students also viewed these Finance questions