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Net Present Value Analysis - Fran's Travel Service is located in Orlando, Florida. The company, which specializes in local, scenic tours, has an opportunity to
Net Present Value Analysis - Fran's Travel Service is located in Orlando, Florida. The company, which specializes in local, scenic tours, has an opportunity to purchase several buses that were recently repossessed by a bank. Although the buses cost $800,000 new and are only three years old, they can be purchased by Fran's for the remaining amount unpuid, which is only $610,000. Moreover, the bank will allow Fran's to pay $400,000 immediately and $70,000 each year for three years, without interest Fran's president, Vera Costeau, estimates that the buses could be operated 300 days per year, carrying 180 tourists per day. The company charges $7.50 per person for its tours. Ms. Costeau estimates that the following expenses would be associated with the buses each year Salaries for bus operators and tour guides. Insurance Fuel.. Bank Payments Promotion for the tours Rent for parking the buses. Maititenance.. Fees and highway taxes.. Depreciation $130,000 9,000 85,000 70,000 21,000 7,200 53,000 4,800 37.333+ Total expenses $417.333 *For the first three years only. +$610.000 cost-$50,000 estimated salvage value $560,000 depreciable cost; 5560.00 + 15 years $37,333 per year. The owner of the property on which the buses would be parked at night would require a deposit of $1,800, which is equal to three months' rent. The deposit would be refunded at the end of the buses' 15-year remaining useful life. In nine years, the buses would need to have all seat coverings replaced at a cost of $35,000. 2 The company's after-tax cost of capital is 10 percent, and the tax rate is 30 1. Compute the net cash receipts (before income taxes) each year from operating the buses. 2. By use of the net present value method, determine whether the buses should be purchased. (Round all dollar amounts to the nearest whole dollar.)
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