General Rules and Requirements:
- Font type - Times New Roman
- Font size-12
- Paragraph spacing - 1.5
· Title page
· This must include: Name of the Institute
· The assignment title
· The name and code of the unit
· Full details of the students who prepared the report (official names and student numbers)
· The due date of the report
· Full name of the unit coordinator
Table of Contents
The final report should include the list of the headings and appendices. It is vital to double-check that the correct page numbers are shown opposite each section of the report.
In the introduction section, you should provide enough details about the purpose of the report, key tasks and generally what the report will cover.
Answers to questions should be organised under appropriate headings and sub-headings. It is vital to include analysis of the sources you are using to answer the questions and report on your research findings.
In the final section of the report, you are expected to summarise all the main points of the report. You will need to list all the findings that are directly linked to the objectives of the report.
Includes a full list of references you have used to complete your report. Please follow a Harvard style system of referencing.
Each appendix normally includes tables, figures, annual financial statements, which are too detailed for them to be included in the body of the report. Appendices are placed at the very end of the report. Each appendix should have a separate number.
CASH FLOW AND CAPITAL BUDGETING
Aus Car Execs (ACE) is set up as a sole trader and is analysing whether to enter the discount used rental car market. This project would involve the purchase of 100 used, late-model, midsized automobiles at the price of $9,500 each. In order to reduce their insurance costs, ACE will have a LoJack Stolen Vehicle Recovery System installed in each automobile at the cost of $1,000 per vehicle. ACE will also utilise one of their abandoned lots to store the vehicles. If ACE does not undertake this project, they could sublease this lot to an auto repair company for $80,000 per year. ACE will pay the $20,000 annual maintenance cost on this lot whether the lot is subleased or used for this project. Also, if this project is undertaken, the net working capital will increase by $50,000.
For taxation purposes, the useful life of the automobiles is determined to be six years, and they will be depreciated using the diminishing value method. Each car is expected to generate $4,800 a year in revenue and have operating costs of $1,000 per year. Starting six years from now, one-quarter of the fleet is expected to be replaced every year with a similar fleet of used cars. This is expected to result in net cash flow (including acquisition costs) of $100,000 per year continuing indefinitely. This discount rental car business is expected to have a minimum impact on ACE’s regular rental car business where the net cash flow is expected to fall by only $25,000 per year. ACE expects to have a marginal tax rate of 32%.
Based on this information, answer the following questions.
1. Estimate the net cash flow for each of the next six years.
2. How are the possible cannibalisation costs considered in this analysis?
3. How does the opportunity to sublease the lot affect this analysis?
4. What do you estimate as the terminal value of this project at the end of year 6 (use a 12% discount rate for this calculation)?
5. Applying the standard discount rate of 12% that ACE uses for capital budgeting, what is the NPV of this project? If ACE adjusts the discount rate to 14% to reflect higher project risk, what is the NPV?
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