Calculate the initial investment and the annual cash flows

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Reference no: EM132483414

Point 1: Thodes Bus Company is considering the replacement of one of its buses with a new one.

Point 2: It is estimated that the new bus will bring in extra revenues amounting to Ksh 12 000 000 per year as well as savings in maintenance costs amounting to Ksh1 300 000 per year. The new bus is expected to cost Ksh19 000 000 plus shipping costs of Ksh1 200 000. The bus is expected to operate for five years and to have a salvage value of Ksh5 000 000. There will be an increase of Ksh100 000 per year in working capital resulting from the use of the new bus.

Point 3: The old bus was bought four years ago and now has a market value of Ksh300 000 and a zero book value.

Point 4: The company elects to claim tax relief on the bus using the current rates and has a tax rate of 30% per year.

Question 1: Calculate:

1. The initial investment.

2. The annual cash flows.

3. The terminal cash flow of the project.

Reference no: EM132483414

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