Answered step by step
Verified Expert Solution
Question
1 Approved Answer
By definition, at IRR, PV = 1 or NPV = 0. To obtain the amount of initial investment, all you have to do is to
By definition, at IRR, PV = 1 or NPV = 0. To obtain the amount of initial investment, all you have to do is to find the present value of $2,000 a year for six periods. PV = $2,000 X 4.355 - $8,710 h34 9.8 Mercury Transit, Inc., has decided to inaugurate express bus service between its headquarters city and a nearby suburb (one-way fare, $0.50), and is considering the purchase of either 32- or 52-passenger buses, on which pertinent estimates are as follows: 32-Passenger 52.Passenger Bus Bus Number of each to be purchased Useful life 8 years 8 years Purchase price of each bus (paid on delivery) $80,000 $110,000 Mileage per gallon 10 7172 Salvage value per bus $ 6,000 $ 7,000 Drivers' hourly wage $ 3.50 $ 4.20 Price per gallon of gasoline $ 0.60 $ 0.60 Other annual cash expenses $ 4,000 $ 3,000 During the four daily rush hours, all buses will be in service and are expected to operate at full capacity (state law prohibits standees) in both directions of the route, each bus covering the route 12 times (six round trips) during the four-hour period. During the remainder of the 16-hour day, 500 passengers would be carried and Mercury Transit would operate only four buses on the route. Part-time drivers would be employed to drive the extra hours during the rush hours. A bus traveling the route all day would go 480 miles, and one traveling only during rush hours would go 120 miles a day during the 260-day year. Ignoring income taxes, answer the following: 1. Prepare a schedule showing the computation of the estimated annual gross revenues from the new route for each alternative. 2. Prepare a schedule showing the computation of the estimated annual drivers' wages for each alternative. 3. Prepare a schedule showing the computation of the estimated annual cost of gasoline for each alternative. 4. Assume that your computations in 1, 2 and 3 are as follows: 32-Passenger Bus 52-Passenger Bus Estimated annual revenues $365.000 $390,000 Estimated annual drivers' wages 67,000 68,000 Estimated annual cost of gasoline 32.000 36,000 Assuming that a minimum rate of return of 12 percent before income taxes is desired and that all annual cash flows occur at the end of the year, determine whether the 32- or the 52-passenger buses should be purchased. Use the NPV method
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started