Ace Car Rental plans to start its business by buying 10 cars at the average pric

Question

Ace Car Rental plans to start its business by buying 10 cars at the average price of $18,000 each, depreciating them completely over 5 years using the straight-line method. It will rent space in a parking lot for $300 a month, paying the rent in advance each month. Ace expects that it will rent five cars on an average day, charging $40 per day per car. The maintenance expense for each car is $60 a month. After 5 years, Ace will sell the cars at 40% of the original value. Ace receives all the income and pays all the bills, (except rent) at the end of each month, but it pays the taxes once a year. Its income tax rate is 25% and it will use 12% as the discount rate. Assume that there are 30 days in a month. Is it a worthwhile project for Ace? Yes, NPV = $57,067

Explanation / Answer

Initital Investment 18000*10 180000 Depreciation (180000/5) 36000 Revenue 5*40*30*12 72000 Maintenance costs 60*12*10 7200 64800 Rent 300*12 3600 61200 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Annual cash flows -180000 61200 61200 61200 61200 61200 Less: Depreciation -36000 -36000 -36000 -36000 -36000 Cash Flow before Tax 25200 25200 25200 25200 25200 Tax@25% 6300 6300 6300 6300 6300 Cash Flow after tax 18900 18900 18900 18900 18900 Cash Flow(Add: Dep) 54900 54900 54900 54900 54900 72000 Total Cash Flows -180000 54900 54900 54900 54900 126900 Discount @12% 1 0.892857143 0.797193878 0.71178 0.63551808 0.567427 Discounted cash Flows -180000 49017.85714 43765.94388 39076.74 34889.9425 72006.47 Net Present value 58756.94712

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