Project 1 Calculations must be done in Excel

As the financial advisor to Upmarket Car Rentals you are evaluating the following types of cars to add to the fleet: -

Speedster: - A sporty convertible with a cost of $120,000 and a useful life of 4 years. It will produce rental income of $80,000 per year and operating costs of $15,000 per year. A major service is required after 2 years costing $20,000. A salvage value of $30,000 is expected after 4 years. The required return is 8%.

Cruncher: - A rugged off-road vehicle costing $180,000 but with an expected useful life of only 2 years, due to the harsh conditions. It will produce rental income of $150,000 per year and operating costs of $20,000 per year. A major service is required after 1 years costing $30,000. A salvage value of $45,000 is expected after 2 years. The required rate of return is 10%.

Income tax can be ignored.

Required

(1)The NPV's of the two cars.

(2)An analysis of the two cars assuming they are mutually exclusive and can be repeated indefinitely.

Project 2 Calculations must be done in Excel - You must create a spreadsheet .

This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV)

As the financial advisor to All Star Manufacturing you are evaluating the following new investment in a manufacturing project: -

The project has a useful life of 12 years.

Land costs $6m and is estimated to have a resale value of $10m at the completion of the project.

Buildings cost $5m, with allowable depreciation of 10% pa reducing balance and a salvage value of $0.9m.

Equipment costs $4m, with allowable depreciation of 20% pa reducing balance and a salvage value of $0.5m. An investment allowance of 20% of the equipment cost is available.

Revenues are expected to be $7m in year one and rise at 5% pa.

Cash expenses are estimated at $3m in year one and rise at 3% pa.

The new product will be charged $400,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project.

An amount of $100,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $7.5m to be repaid annually with equal instalments at a rate of 4% pa over 12 years.

Except for initial outlays, assume cash flows occur at the end of each year.

The tax rate is 30% and is payable in the year in which profit is earned.

The after-tax required return for the project is 8% pa.

Required

(a)Calculate the NPV.Is the project acceptable? Why or why not?

(b)Conduct a sensitivity analysis showing how sensitive the project is to revenues, the resale value of the land and to the required rate of return. Explain your results.