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(Solved) Crown Limousine Service is considering acquisition of an additional vehicle. The model under consideration will cost $80,000, have a 5 year life and...


Crown Limousine Service is considering acquisition of an additional vehicle. The model under consideration will cost $80,000, have a 5 year life and a $20,000 residual value. The company anticipates that the effect on annual net income will be as follows:

 

                                               Revenue                                             $109,500

                                               Less expenses:

                                               Driver                                                     60,000

                                               Fuel                                                         3,750

                                               Maintenance                                       1,600

                                               Insurance                                              1,500

                                               Depreciation                                      12,000

                                               Miscellaneous                                      1,000    

                                               Total expense                                    79,850                                                                                                              Income before taxes                       29,650

                                               Taxes at 40%                                       11,860

                                               Net Income                                        17,790

 

Required:

               Calculate the Net Present Value of the investment assuming the company has a required rate of return of 14 percent. Should the company invest in the new limousine?

(7 marks)

 

 

III. Case Study:

 

               Stan Mayfield, president of Mayfield Software, is interested in acquiring a used aircraft to facilitate business travel. The aircraft he is interested in will cost $ 1,000,000. It has a five life with an anticipated residual value of $ 600,000.

 

               Mayfield estimates that he and four other executives each take 100 trips per year at a cost of $550 per trip (they fly first class and, often, two or more of the executives fly together). The costs are expected to increase at 4 percent per year.

 

               If Mayfield buys the plane, a pilot will be hired at a cost of $85,000 per year. Fuel, maintenance, insurance and other operating costs will be $330,000 per year. This includes $80,000 of depreciation, but excludes the pilotâs salary. The pilotâs salary and operating costs (other than depreciation) will increase at 4 percent per year due to general inflation.

 

               Mayfield values the time he and other executives will save using a company plane at $500 per trip per person. He believes that the value of executive time will increase at least as fast as general inflation. The company tax rate is 40 percent and its required rate of return is 10 percent.

 

Required:

               Analyze the investment in the plane.

 

 


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