Honda and GM are competing to sell a fleet of cars to Hertz. For simplicity, we assume straight$-$ line depreciation and that Hertz will dispose of the cars after five years. Hertz expects that the autos will have no salvage value. Hertz expects a fleet of $50$ cars to generate $$400,000$ per year in pretax income. Hertz is in the $40-$percent tax bracket and the firm$$s overall required return is $10$ percent. The addition of the new fleet will not add to the risk of the firm.

$($a$)$ What is the maximum price that Hertz should be willing to pay for the fleet of cars?

$($b$)$ Suppose the price of the fleet $($in Canadian dollars$)$ is $$1,300,000$; both suppliers are

charging this price. Hertz is able to issue $$800,000$ in debt to finance the project. The

bonds can be issued at par and will carry an $8-$percent interest rate. Hertz will incur no

costs to issue the debt and no costs of financial distress. What is the APV of this project

if Hertz uses debt to finance the auto purchase?

$($c$)$ To entice Hertz to buy the cars from Honda, the Japanese government is willing to lend

Hertz $$800,000$ at $5$ percent. Now what is the maximum price that Hertz is willing to pay

Honda Canada for the fleet of cars?