Question
Zulu Car Rental Corporation is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over
Zulu Car Rental Corporation is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over 5 years using the straight line method. The new cars are expected to generate $140,000 per year in earnings before taxes and depreciation for 5 years. The company is entirely financed by equity and has a 35% tax rate. The required return on the companys unlevered equity is 13% and the new fleet will not change the risk of the company. o What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity firm? o Suppose the company can purchase the fleet of cars for $395,000. Additionally, assume the company can issue $260,000 for 5 year, 8% debt to finance the project. All principal will be repaid in one balloon payment at the end of the 5th year. What is the adjusted present value (APV) of the project? please show all calculations
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