Problem 18-1 NPV and APV Benton 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 four years using the straight- line method. The new cars are expected to generate $255,000 per year in earnings before taxes and depreciation for four years. The company is entirely financed by equity and has a 25 percent tax rate. The required return on the company's unlevered equity is 14 percent and the new fleet will not change the risk of the company. The risk-free rate is 5 percent. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the company can purchase the fleet of cars for $625,000. Additionally, assume the company can issue $370,000 of four-year debt to finance the project at the risk-free rate of 5 percent. All principal will be repaid in one balloon payment at the end of the fourth year. What is the APV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Maximum price b. APV

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Nikul

Problem 18-1 NPV and APV
Benton 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 four years using the straight-
line method. The new cars are expected to generate $255,000 per year in earnings
before taxes and depreciation for four years. The company is entirely financed by equity
and has a 25 percent tax rate. The required return on the company's unlevered equity is
14 percent and the new fleet will not change the risk of the company. The risk-free rate is
5 percent.
a. What is the maximum price that the company should be willing to pay for the new
fleet of cars if it remains an all-equity company? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. Suppose the company can purchase the fleet of cars for $625,000. Additionally,
assume the company can issue $370,000 of four-year debt to finance the project at
the risk-free rate of 5 percent. All principal will be repaid in one balloon payment at
the end of the fourth year. What is the APV of the project? (Do not round
intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a. Maximum price
b. APV
Transcribed Image Text:Problem 18-1 NPV and APV Benton 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 four years using the straight- line method. The new cars are expected to generate $255,000 per year in earnings before taxes and depreciation for four years. The company is entirely financed by equity and has a 25 percent tax rate. The required return on the company's unlevered equity is 14 percent and the new fleet will not change the risk of the company. The risk-free rate is 5 percent. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the company can purchase the fleet of cars for $625,000. Additionally, assume the company can issue $370,000 of four-year debt to finance the project at the risk-free rate of 5 percent. All principal will be repaid in one balloon payment at the end of the fourth year. What is the APV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Maximum price b. APV
Expert Solution
steps

Step by step

Solved in 3 steps with 3 images

Blurred answer
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education