Tasmanian Motor Rental (TMR) is set up as a proprietary company

in car rental industry

and is considering

whether to enter the discount ren

tal car market in Tasmania. Th

is project would involve

the purchase of 100

used late model, mid-sized cars at the average price of $15,000

. In order to reduce their insurance costs, TMR

will have a LoJack Stolen Vehicle Recovery System installed in

each car at a cost of $1,500 per vehicle. The

rental car operation projected by TMR will have two locations:

one near Hobart airport and the other near

Launceston airport. At each loca

tion, TMR owns an abandoned lot

and building where it could sotre its

vehicles. If TMR does not undertake the project, the lots can b

e leased to an auto-repair company for $90,000

per year (Total amount for both

lots). The $25,000 annual maint

enance cost (total for

both lots) will be paid

by TMR whether the lots are lease

d or used for this project. Th

is discount rental car business is expected to

result in a fall in its regul

ar car rental business by $20,000

per year.

For taxation purposes, the useful life of the cars is determine

d to be five years and they will be depreciated

using the straight-line depreciation method over 5 years with n

o residual values at the end. It is assumed that

the cars will first be used at

the beginning of the next financ

ial year: 1 July 2019.

Before starting this new operation, TMR will need to redevelop

and renovate the buildings at each airport

locations. This is expected to cost $215,000 for both locations

. Assume that TMR is not able to claim any

annual tax deduction for the cap

ital expenditure to the renovat

ion of the building unt

il the business is sold.

TMR has also budgeted marketing costs which will be spent at th

e initiation of the project and also during

the first two years of operati

on. The estimated costs are $30,0

00 per year. These costs are fully tax deductible

in the year they are incurred. In addition, if the project is u

ndertaken, a total new in

jection of $150,000 in net

working capital will be required. There will be no additional w

orking capital required from the

commencement of the operation unt

il the end of the project. The

initial networking capital will be recovered

in full by the end of year 5.

Revenue projections from the car r

ental for the next five years

are as follows:

Year 1

Year 2

Year 3

Year 4

Year 5

Beginning

1/7/2019 1/7/2020 1

/7/2021 1/7/2022 1/7/2023

Ending

30/6/2020 30/6/2021 30/

6/2022 30/6/2023 30/6/2024

Revenue ($ '000)

850

1,050

1,100

1,250

1,250

Operating variable costs associated with the new business repre

sent 10% of revenue. Annual operating fixed

costs (excluding depreciation) a

re $1,800 per vehicle. Existing

administrative costs are $550,000 per annum.

As a result of the new operati

on, these administrative costs wi

ll increase by 20%. The company is subject to

a tax rate of 27.5%

on its profits.

.