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
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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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
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