Problem $18-1$ NPV and APV

Benton is a rental car company that is trying to determine whether to add $25$ cars to its

fleet. The company fully depreciates all its rental cars over five years using the straight$-$

line method. The new cars are expected to generate $$185,000$ per year in earnings

before taxes and depreciation for five years. The company is entirely financed by equity

and has a $22$ percent tax rate. The required return on the company's unlevered equity is

$12$ percent and the new fleet will not change the risk of the company. The risk$-$free rate is

$5$ percent.

a$.$ What is the maximum price that the company should be willing to pay for the new

fleet of cars if it remains an all$-$equity company? $($Do not round intermediate

calculations and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ Suppose the company can purchase the fleet of cars for $$640,000.$ Additionally,

assume the company can issue $$400,000$ of five$-$year debt to finance the project at

the risk$-$free rate of $5$ percent. All principal will be repaid in one balloon payment at

the end of the fifth year. What is the APV of the project? $($Do not round intermediate

calculations and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

a$.$ Maximum price

b$.$ APV