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THE BIG RIG TRUCK RENTAL COMPANY The Big Rig Rental Company, which owns and rents out 50 nance. Big Rig has fixed office costs of $60,000 per year trucks, is for sale for $400,000. Tom Grossman, the com- and pays property taxes of $35,000 per year. Property pany's owner, wants you to develop a five-year economic taxes are expected to grow at a rate of 3 percent per year, analysis to assist buyers in evaluating the company. and maintenance costs are expected to grow 9 percent per The market rate for truck rentals is currently $12,000 per year due to the age of the fleet. However, office costs are year per truck. Atthis base rate, an average of62 percent of predicted to remain level. Profits are subject to a 30 the trucks will be rented each year. Tom believes that if the percent income tax. The tax is zero if profit is negative rent were lowered by $1,200 per truck per year, utilization Cash flow in the final year would include cash from the would increase by seven percentage points. He also believes sale of the business. Because the trucks have all been fully that this relationship would apply toadditional reductions in depreciated, there are no complicating tax effects: Rev. the base rate. Forexample, at a$7,200rental rate,90 percent enue from the sale of the business will effectively be taxed of the trucks would be rented. This relationship would apply at the 30 percent rate. Investment profit for the buyer is to increases in the base rate as well. Over the next five years defined to be the Net Present Value of the annual cash the base rental rate should remain stable flows, computed at a discount rate of 10 percent. (All At the end of five years, it is assumed that the buyer will operating revenues and expenses are in cash.) The calcu- resell the business for cash. Tom estimates that the selling lation of NPV includes the purchase price, incurred at the price will be three times the gross revenue in the final year. beginning of year 1, and net income from operations The cost of maintaining the fleet runs about $4,800 per (including the sale price in year 5) over five years truck per year (independent of utilization), which (incurred at the end of the year). There would be no includes inspection fees, licenses, and normal mainte- purchases or sales of trucks during the five years