The Utah Transit Authority operates buses on different inter$-$city routes. The management is considering upgrading its fleet of $50$ standard buses $($purchased $5$ years ago for $$8$ million$),$ which has a current book value of $$3$ million. It expects to sell the existing fleet for $$4$ million and purchase a new fleet at a cost of $$12$ million.

The existing revenue of the fleet is $$4$ million per year, which is expected to rise by $25\%$ if the new fleet is purchased. $($Note the increase is one time increase and will be the same for all years when purchasing the new fleet$)$

The existing operating cost of the fleet is $$2$ million, which is expected to drop by $20\%$ if they purchase the new fleet of buses. This operating cost does not include the depreciation of the fleet.

Determine if replacement is a good idea if the company$$s cost of capital is $10\%$ and the analysis period is $8$ years. $($i$.$e$.$ they will either keep the old fleet for $8$ years and or the new fleet for $8$ years. The company pays taxes at the rate of $30\%,$ and it charges depreciation on a straight$-$line basis.

Required: Points

$1.$ Prepare a schedule to show the net present value of the current fleet of vehicles. Show cash flows for each item in a single column, using the template below. $8$

$2.$ Prepare a schedule to show the net present value of the purchasing the new fleet of vehicles. Show cash flows for each item in a single column, using the template below. $8$

$3.$ Prepare a schedule that shows the net cash flow for the current fleet, the purchase, and the incremental cash flows as the differenced between the two options. $4$

For each schedule show the Present value of the cash flows and the net present value fore the cash flows. For #$3$ show the internal rate of return $($IRR$)$ For IRR in #$32$

$4.$ Based on your analysis, present your recommendations to management and support for your decision. $3$

$25$

$1.$ Keep the Existing Fleet in thosands

Capital Inv Sale of Old Revenues Oper Cost Depreciation OP Income Tax Net Income Depr Tot Cash Flow

Year $0$

Year $1$

Year $2$

Year $3$

Year $4$

Year $5$

Year $6$

Year $7$

Year $8$

PV

NPV

$2.$ Purchase the new Fleet

Year $0$

Year $1$

Year $2$

Year $3$

Year $4$

Year $5$

Year $6$

Year $7$

Year $8$

PV

NPV

$3.$ Incremental Cash Flows

Keep Purchase Incremental

Year $0$

Year $1$

Year $2$

Year $3$

Year $4$

Year $5$

Year $6$

Year $7$

Year $8$

PV Required:

Prepare a schedule to show the net present value of the current fleet of vehicles. Show cash flows for each item in a single column, using the template below.

Prepare a schedule to show the net present value of the purchasing the new fleet of vehicles. Show cash flows for each item in a single column, using the templ

Prepare a schedule that shows the net cash flow for the current fleet, the purchase, and the incremental cash flows as the differenced between the two options.

For each schedule show the Present value of the cash flows and the net present value fore the cash flows. For #$3$ show the internal rate of return $($IRR$)$

Based on your analysis, present your recommendations to management and support for your decision.

Your Recommendation:

NPV

IRR