A company is currently paying a sales representative $0.60 per mile to drive her

Question

A company is currently paying a sales representative $0.60 per mile to drive her car for company business. The company is considering supplying the representative with a car, which would involve the following: A car costs $25,000, has a service life of 5 years, and a market value of $5,000 at the end of that time. Monthly storage costs for the car are $200, and the cost of fuel, tires, and maintenance is 20 cents per mile. The car will be depreciated by MACRS, using a recovery period of 5 years (20%, 32%, 19.20%, 11.52%, and 11.52%). The firm’s marginal tax rate is 40%.

• Suppose that the required travel by the sales person would be 30,000 miles per year. Which option would be better at i = 15%?

• What annual mileage must a salesman travel by car for the cost of the two methods of providing transportation to be equal if the interest rate is 15%?

(a) Determine the annual net cash flows from the project.

(b) Perform a sensitivity analysis on the project’s data, varying savings in telephone bills and savings in deadhead miles. Assume that each of these variables can deviate from its base-case expected value by ±10%, ±20%, and ±30%.

(c) Prepare sensitivity diagrams and interpret the results.

Explanation / Answer

Clearly buying a car is much better than, Paying the sales representative.

Current scenario calcultion is for understanding don't correlate it with the answer.

(a) refer early solution on the top NPV is 1841.611.

(b) Multiply the values obtained by 1.1, 1.2, 1.3 for the increase and incase of decrease by .9, .8, .7 before discount rate. you will multiply them with car cost, storage cost and cost of fuel,tyre e.t.c or on total cost. same will be done for current cost you pay to sales representative.

Increase of cost by 1.1

c.)

NPV will Increase if all variables are increased in the data set and NPV will be negative if all cost variable are touched, so if all cost variables are increased for the company it is a better scenario.

Buying car scenario Current scenario Particulars 0 1 2 3 4 5 Particulars 0 1 2 3 4 5 Car cost -25000 Current Cost = mile travelled * per mile cost 18000 18000 18000 18000 18000 Storage cost -200 -200 -200 -200 -200 Interest rate 1 0.869565 0.756144 0.657516 0.571753 0.497177 Cost of fuel, maintenance and tyre -6000 -6000 -6000 -6000 -6000 Discounted Value 0 15652.17 13610.59 11835.29 10291.56 8949.181 Depriciation -5000 -8000 -4800 -2880 0 Sale value 5000 Total cost on purchase -25000 -11200 -14200 -11000 -9080 -1200 Savings in costs -25000 6800 3800 7000 8920 16800 Taxes @ 40% -10000 2720 1520 2800 3568 6720 EAT -35000 9520 5320 9800 12488 23520 Add: depriciation 5000 8000 4800 2880 0 NOPAT -35000 14520 13320 14600 15368 23520 Interest rate 1 0.869565 0.756144 0.657516 0.571753 0.497177 Discounted Value -25000 5913.043 2873.346 4602.614 5100.039 8352.569

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