The Elite Car Rental Corporation is contemplating expanding its short$-$term rental fleet by $30$

automobiles at

a cost of $$900,000.$

It expects to keep the autos for only two years and to sell them at the end of that period

for $60$ percent, on average, of what they cost.

The plan is to generate $$21,000$ of incremental revenue per

additional auto in each year of operation.

The controller estimates other costs will amount to $20$ cents per

kilometre on an average of $40,000$ kilometres per car per year.

She also estimates that the new business

will require an investment of $$10,000$ in additional working capital.

The firm is in a $30$ percent tax bracket and

uses $12$ percent as a cost of capital.

Should Elite purchase the automobiles? Do all of the necessary

calculations to substantiate your

recommendations.

The answer should be$-$

Using the facts from the problem, enter formulas to solve the requirements of the problem.

Tax rate $30\%$ Salvage value $$540,000$

CCA rate $40\%$ Revenues $$630,000$

Cost of capital $12\%$ Expenses $$240,000$

Length of project $2$ Investment $$900,000$

Working capital $$10,000$

Step $1$:

Calculate Tax Shield

using formula below:

$=($initial cost minus

present value of

salvage$)*(($CCA

Rate$*$Tax Rate$)/($CCA

Rate $+$ Cost of

Capital$)*(1+(\mathrm{.}5*$cost of

capital$))/(1+$cost of

capital$))$

$=(900,000-430,485)$

$*((\mathrm{.}4*\mathrm{.}3)/\mathrm{.}4+\mathrm{.}12))$

$*((1+(\mathrm{.}5*\mathrm{.}12)/(1+\mathrm{.}12))$

$=469515*\mathrm{.}23076*$

$\mathrm{.}94642$

Tax Shield $=$ $$102,540$

Step $2$:

Determine the present value of cash flow

sources.

Expected After tax Present

Event Year$($s$)$ Cash Flow Cash Flow Value

Investment $0-$$$900,000-$$$900,000$

Working capital $0(10,000)(10,000)$

Cash flow $1-2390,000273,000461,384$ Formula $9-5$a

Salvage $($sale$)2540,000430,485$ Formula $9-3$

Working capital

recovery $210,0007,972$ Formula $9-3$

CCA pool $0102,545$

Step $3$:

Determine the net present value of the project by summing the last column.

NPV $$92,386$

Recommendation Elite should purchase the automobiles.

Kindly explain all the steps $($even CAA formula$)$ using finanacial calculator