• UniformL is deciding if they should invest in a charter company to run trips to various educational and cultural sites throughout the southeast of the. To make the vehicles more cost-effective and the trips more popular, each of eight new buses will be equipped with a kitchenette and a video screen for movies and sports telecasts.

• Each bus costs $250,000 and requires customized equipment that costs an additional $100,000 per bus. All the buses and the equipment have a recovery period (MACRS life) of 5 years. An advertising campaign, which will start immediately, costs $600,000 and will be paid for immediately. Other start-up costs total $75,000.

• The sports trips are scheduled for 3-10 days and will generate revenues of $100 per day per seat. For the eight video buses, total revenues are expected to be $3,168,000 for the first year and $3,484800 for the second year (a 10% increase), and increase at a rate of 10% each year for the life of the project. Operating costs are 35% of total revenues. Personnel expenses, including driver salaries, are $650,000 in year 1 and will increase by 15% in year 2 and each year for the life of the three-year project.

• The company expects to discontinue operation of its video bus tours after the third year. Each bus will be sold to a university for $75,000 ($60,000 for the bus itself and $15,000 for the equipment). The finance department has determined that the beta of this project is 1.50, while the market return is expected to be 15%. Treasury bills pay a nice safe 1 percent. Hawk Transport can finance the entire project with a bank loan from their local First Guaranty Bank at 10%.

The firm wants to maintain their target debt to equity ratio of 1:1.:

o What are the cash flows for the initial investment period (CF₀)?

o What is the MACRS depreciation schedule for the of the project for all of the buses and the equipment? Include this in your Income Statement (*and Cash Flow) They fall into the MACRS 5-year class. See below

o What are the after-tax cash flows for the years that the bus tours will be in operation if their combined state and local tax rate is 30%?

o What are the termination cash flows in the final year?

o If NPV analysis is used, should the buses be purchased?

MACRS Table

Please follow the format below

PROJECT CASH FLOW - FORMAT 3 N 1 DESCRIPTION TIME IN YEARS 0 1 2 L INITIAL INVESTMENT price of new et. (2x) Installation (w) freight () Change in working capital MVof old enl. tax on (gainyles from sale of eld" ** Total Initially (XX) IL OPERATING CASH FLOWS TE Change in revenue, net of tax (change in revenue)(I-T) (x2) Change in operating expense, net of tax (n) (u) (*) (**) (change in eepKI-T) R TE Depreciation tas-shield (change in Depr) (T) Operating cash flows XX XX XX XX XX TIL NON-OPERATING TERMINAL YR. CASH FLOWS Sale of new et Taxon (gainless on new eqt. Recovery of working capital Opportunity cost of old egt." (salvage value of old egt.) Total terminal cash flow XX NET PROJECT CASH FLOWS (XX) XX XX XX xx XX * Only if it is a replacement analysis (old equipment is replaced by new) ** Can be positive or negatives positive in case of loss and negative in case of gain en disposal