Intercity Bus is interested in acquiring a new bus to give full service a new route. The route will be from Gold Coast to Coffs Harbour. The bus will run one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the bus is 50. Bus are expected to be fully booked. The average revenue per passenger per flight (one-way) is $150. Annual operating costs of the aircraft follow:

Petrol	$ 750 000
Driver	50 000
Maintenance	750 000
Other	100 000
Total	$1 650 000

The bus will cost $ 750 000 and has an expected life of 10 years with no salvage value. The company requires a 12% return. Assume there are no income taxes.

REQUIRED:

1. Calculate the NPV for the bus. Should the company buy it? (2 marks)
2. Jodie, the marketing manager for the Intercity Bus believes that the assumption of 100% booking is unrealistic. She estimates that the booking rate will be somewhere between 70 and 80%, with the most likely rate being 75%. Recalculate the NPV by using a 75% seating capacity. Should the bus be purchased? (2 marks)
3. Without considering point no (2), how many one-way seat to be sold each year to obtain Net Present Value = zero (2 marks)
4. Would you now recommend Intercity Bus to buy a new bus? (1 mark)
5. What other factors should you consider before making the decision? Please specify three factors and reasons why those factors should be considered. (3 marks)