UniformL is deciding if they should invest in a charter company to run trips to various educational and cultural sites throughout the southeast of the. To make the vehicles more cost-effective and the trips more popular, each of eight new buses will be equipped with a kitchenette and a video screen for movies and sports telecasts. Each bus costs $250,000 and requires customized equipment that costs an additional $100,000 per bus. All the buses and the equipment have a recovery period (MACRS life) of 5 years. An advertising campaign, which will start immediately, costs $600,000 and will be paid for immediately. Other start-up costs total $75,000. The sports trips are scheduled for 3-10 days and will generate revenues of $100 per day per seat. For the eight video buses, total revenues are expected to be $3,168,000 for the first year and $3,484800 for the second year (a 10% increase), and increase at a rate of 10% each year for the life of the project. Operating costs are 35% of total revenues. Personnel expenses, including driver salaries, are $650,000 in year 1 and will increase by 15% in year 2 and each year for the life of the three-year The company expects to discontinue operation of its video bus tours after the third Each bus will be sold to a university for $75,000 ($60,000 for the bus itself and $15,000 for the equipment). The finance department has determined that the betaof this project is 1.50, while the market return is expected to be 15%. Treasury bills pay a nice safe 1 percent. Hawk Transport can finance the entire project with a bank loan from their local First Guaranty Bank at 10%. The firm wants to maintain their target debt to equity ratio of 1:1. Should the company proceed with this project? Demonstrate your decision by answering the following questions (build a cash flow estimate, and in it show): o What are the cash flows for the initial investment period (CF0)? o What is the MACRS depreciation schedule for the of the project for all of the buses and the equipment? Include this in your Income Statement (*and Cash Flow) They fall into the MACRS 5-year class. See below o What are the after-tax cash flows for the years that the bus tours will be in operation if their combined state and local tax rate is 30%? o What are the termination cash flows in the final year? o If NPV analysis is used, should the buses be purchased? MACRS Table

UniformL is deciding if they should invest in a charter company to run trips to various educational and cultural sites throughout the southeast of the. To make the vehicles more cost-effective and the trips more popular, each of eight new buses will be equipped with a kitchenette and a video screen for movies and sports telecasts. Each bus costs $250,000 and requires customized equipment that costs an additional $100,000 per bus. All the buses and the equipment have a recovery period (MACRS life) of 5 years. An advertising campaign, which will start immediately, costs $600,000 and will be paid for immediately. Other start-up costs total $75,000. The sports trips are scheduled for 3-10 days and will generate revenues of $100 per day per seat. For the eight video buses, total revenues are expected to be $3,168,000 for the first year and $3,484800 for the second year (a 10% increase), and increase at a rate of 10% each year for the life of the project. Operating costs are 35% of total revenues. Personnel expenses, including driver salaries, are $650,000 in year 1 and will increase by 15% in year 2 and each year for the life of the three-year The company expects to discontinue operation of its video bus tours after the third Each bus will be sold to a university for $75,000 ($60,000 for the bus itself and $15,000 for the equipment). The finance department has determined that the betaof this project is 1.50, while the market return is expected to be 15%. Treasury bills pay a nice safe 1 percent. Hawk Transport can finance the entire project with a bank loan from their local First Guaranty Bank at 10%. The firm wants to maintain their target debt to equity ratio of 1:1. Should the company proceed with this project? Demonstrate your decision by answering the following questions (build a cash flow estimate, and in it show): o What are the cash flows for the initial investment period (CF0)? o What is the MACRS depreciation schedule for the of the project for all of the buses and the equipment? Include this in your Income Statement (*and Cash Flow) They fall into the MACRS 5-year class. See below o What are the after-tax cash flows for the years that the bus tours will be in operation if their combined state and local tax rate is 30%? o What are the termination cash flows in the final year? o If NPV analysis is used, should the buses be purchased? MACRS Table

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

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Question

UniformL is deciding if they should invest in a charter company to run trips to various educational and cultural sites throughout the southeast of the. To make the vehicles more cost-effective and the trips more popular, each of eight new buses will be equipped with a kitchenette and a video screen for movies and sports telecasts.

Each bus costs $250,000 and requires customized equipment that costs an additional $100,000 per bus. All the buses and the equipment have a recovery period (MACRS life) of 5 years. An advertising campaign, which will start immediately, costs $600,000 and will be paid for immediately. Other start-up costs total $75,000.

The sports trips are scheduled for 3-10 days and will generate revenues of $100 per day per seat. For the eight video buses, total revenues are expected to be $3,168,000 for the first year and $3,484800 for the second year (a 10% increase), and increase at a rate of 10% each year for the life of the project. Operating costs are 35% of total revenues. Personnel expenses, including driver salaries, are $650,000 in year 1 and will increase by 15% in year 2 and each year for the life of the three-year

The company expects to discontinue operation of its video bus tours after the third Each bus will be sold to a university for $75,000 ($60,000 for the bus itself and $15,000 for the equipment). The finance department has determined that the betaof this project is 1.50, while the market return is expected to be 15%. Treasury bills pay a nice safe 1 percent. Hawk Transport can finance the entire project with a bank loan from their local First Guaranty Bank at 10%.

The firm wants to maintain their target debt to equity ratio of 1:1.

Should the company proceed with this project? Demonstrate your decision by answering the following questions (build a cash flow estimate, and in it show):

o What are the cash flows for the initial investment period (CF₀)?

o What is the MACRS depreciation schedule for the of the project for all of the buses and the equipment? Include this in your Income Statement (*and Cash Flow) They fall into the MACRS 5-year class. See below

o What are the after-tax cash flows for the years that the bus tours will be in operation if their combined state and local tax rate is 30%?

o What are the termination cash flows in the final year?

o If NPV analysis is used, should the buses be purchased?

MACRS Table

MACRS Schedule:
Table A-1.
3-, 5-, 7-, 10-, 15-, and 20-Year Property
Half-Year Convention
Depreciation rate for recovery period
Year
3-year
5-year
7-year
10-year
15-year
20-year
1
33.33%
20.00%
14.29%
10.00%
5.00%
3.750%
44.45
32.00
24.49
18.00
9.50
7.219
14.81
19.20
11.52
11.52
17.49
14.40
8.55
6.677
4
7.41
12.49
11.52
7.70
6.177
8.93
9.22
6.93
5.713
8.92
8.93
5.76
7.37
6.23
5.285
4.888
4.522
7
6.55
5.90
8.
4.46
6.55
5.90
6.56
5.91
4.462
10
6.55
5.90
4.461
11
3.28
5.91
4.462
12
5.90
4.461
13
5.91
4.462
14
5.90
4.461
15
5.91
4.462
16
2.95
4.461
17
4.462
18
4.461
19
4.462
20
4.461
21
2.231

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