Reference no: EM131192555
A private school is considering the purchase of six school buses to transport students to and from school events. The initial cost of the buses is $600,000. The life of each bus is estimated to be five years, after which time the vehicles would have to be scrapped with no salvage value. The school's management team has derived the following estimates for annual revenues and cost for the next five years:
yr.1 yr.2 yr.3 yr.4 yr.5
Revenues: $330,000 $330,000 $350,000 $380,000 $400,000
Driver Costs 33,000 35,000 36,000 38,000 40,000
Repairs & Maint. 8,000 13,000 15,000 16,000 18,000
Other Costs 130,000 135,000 140,000 136,000 142,000
Annual Depreciat. 120,000 120,000 120,000 120,000 120,000
The buses would be purchased at the beginning of the project (i.e., in year 0), and all revenues and expenditures shown in table above would be incurred at the end of each revelant year. The schools are exempt from taxes, the school's corporate tax rate is 0 percent. A business consultant has advised management that they should use a weighted average cost of capital (WACC) of 10.5 percent to evaluate this project. 1) prepare a table showing estimated net cash flows for each year of the project, explaining all steps involved in calculating year 1 estimated net cash flow. 2) Calculate the payback period, explaining steps; 3) Calculate the project's internal rate of return (IRR), explaining all steps involved in calculating process; 4) Calculate the project's net present value (NPV), explaining all steps. 4) Which of the three evaluation techniques computed (i.e., payback period, IRR and NPV), should the firm use to make its decision of whether or not to accept this project? and Why? and Is one of these techniques better than the others? if so, why? What are some of the risk factors inherent in this capital budgeting analysis? List at least 3 items that could cause the outcome of this project to be substantially worse than management currently expects (as reflected in their revenue and cost estimates, WACC estimates), explain each of the risk factors identified.
|
Work breakdown structure-activities for cell phone design
: You work for Nokia in their global cell phone group. You have been made project manager for the design of a new cell phone. Your supervisors have already scoped the project so you have a list showing the work breakdown structure and this includes maj..
|
|
Most important factor contributing to motivation
: Why do you think making progress ranks as the most important factor contributing to motivation according to a recent study? How can managers provide a sense of progress for employees working on long-range projects that might not show results for mont..
|
|
What specific customer service measures
: Describe the advantages of using a balanced scorecard to measure and control organizational performance. Suppose you created a balanced scorecard for Walmart. What specific customer service measures would you include?
|
|
Expansion project-requires an initial fixed asset investment
: Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it wil..
|
|
Calculate the project internal rate of return
: A private school is considering the purchase of six school buses to transport students to and from school events. The initial cost of the buses is $600,000. The buses would be purchased at the beginning of the project (i.e., in year 0), and all reven..
|
|
What effect decrease in the offered sales price
: A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity [interest rate] is the bond offering. Assume interest payments are paid semi-annually, and solve using semi-annual compounding. Explain..
|
|
Mutually exclusive projects-calculate the payback period
: Maxwell Software, Inc., has the following mutually exclusive projects. Year Project A Project B 0 –$17,000 –$20,000 1 10,500 11,500 2 7,000 8,000 3 2,600 7,000 a-1. Calculate the payback period for each project. Payback period Project A years Projec..
|
|
Planning its spring awards dinner as fundraising event
: Millbridge Animal Protective Services (MAPS) is planning its spring awards dinner as a fundraising event. It is planning to charge each attendee $150. Feast Hall, the site of the dinner, will charge MAPS $5,000 for the use of its posh VIP Room and $5..
|
|
Saving for your retirement by depositing
: Suppose you begin saving for your retirement by depositing $2000 per year in an IRA. If the interest rate is 12.3%, how much will you have in 35 years if each deposit occurs at the end of the year? How much if you make yearly deposits beginning today..
|