The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost $ 30,000 Years of useful life (economic life) 1 Tax rate 20% Required rate of return on equity 10% Required return on debt 5% Debt ratio 50% Annual revenues $ 145,000 Operating expenses (excluding depreciation) $ 100,000 Part B: PROJECT RISK ANALYSIS (sensitivity to base case assumptions): using base case sales, and 9.5% operating margin, and also 10.5% operating margin; Do likewise using base case values; with sales 5% lower than base case, and also 5% higher than base case. Report the highest NPV and the lowest NPV values. How different are these than the base case NPV?
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end.
The firm is contemplating the following:
Vehicle acquisition cost $ 30,000
Years of useful life (economic life) 1
Tax rate 20%
Required rate of
Required return on debt 5%
Debt ratio 50%
Annual revenues $ 145,000
Operating expenses (excluding
- Part B: PROJECT RISK ANALYSIS (sensitivity to base case assumptions): using base case sales, and 9.5% operating margin, and also 10.5% operating margin; Do likewise using base case values; with sales 5% lower than base case, and also 5% higher than base case. Report the highest NPV and the lowest NPV values. How different are these than the base case NPV?
Net present value is the tool to identify the present value of future cash flows to check whether the investment made in the project is worth or not. it is calculated by discounting the estimated future cash flows with the help of rate of return. based on this analysis important investment decisions are taken. the results of the NPV may positive, negative or zero which is based on the factors used. using NPV concept we get to know the opportunity cost of an investment and also helps to plan the investments to earn inflation-beating returns.
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