Question
honda and gm are competing to sell a fleet of cars to hertz. hertz uses straight-line depreciation on its rental cars, and disposes of the
honda and gm are competing to sell a fleet of cars to hertz. hertz uses straight-line depreciation on its rental cars, and disposes of the cars after 5 years (without salvage value). hertz expects the cars to generate $100,000 pre-tax income (ebdit) per year. hertz is in the 34% tax bracket and the firm's overall required return is 10%. t-bonds are priced to yield 6%. what is the maximum price that hertz should be willing to pay for the fleet of cars? suppose that the price of the fleet of cars equals $325,000; both suppliers charge this price. hertz is able to issue $200,000 in debt (bonds) to finance the project. the bonds can be issued at par and will carry an 8% interest rate. issue costs and financial distress costs are negligible. what is the npv of this project if hertz uses debt to finance the car purchase?
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