Reference no: EM132954472

Capital Budgeting Decisions and Decision Rules

A private transport company is considering the purchase of six buses to transport students to and from school events. The initial cost of the buses is Rs. 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 company's management team has derived the following estimates for annual revenues and cost for the next five years.

The buses would be purchased at the beginning of the project (i.e., in Year 0) and all revenues and expenditures shown in the table above would be incurred at the end of each relevant year.

Particulars               Total (in Rs.)

Revenues                   Rs. 3,30,000

Driver Cost                      Rs. 33,000

Depreciation               10% on straight line Basis

The company is under the corporate tax bracket of 10% and weighted average cost of capital (WACC) of 10.5 percent to evaluate this project.

You are required to:

Problem 1: Prepare a cash flow table.

Problem 2: Which are the evaluation techniques that you suggest should the firm use to make its decision of whether or not to accept this project? Why? Is one of these techniques better than the others and if so, why?