Five years using the straight-line method

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Reference no: EM131919668

Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $175,000 per year in earnings before taxes and depreciation for five years. The company is entirely financed by equity and has a 35 percent tax rate. The required return on the company’s unlevered equity is 13 percent, and the new fleet will not change the risk of the company.

a. What is the maximum price that the company should be willing to pay for the new fleet of cars (i.e., the maximum investment amount you would pay) if it remains an all-equity company? [Assume that the depreciation tax shields can be discounted using a lower rate of 8%].

b. Suppose the company can purchase the fleet of cars for $480,000. Additionally, assume the company can issue $390,000 of five-year, 8 percent debt to finance the project. Assume there is no floatation cost. All principal will be repaid in one balloon payment at the end of the fifth year. What is the adjusted present value (ANPV) of the project?

Reference no: EM131919668

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