Name: ought a $10,000 car to make an extra cash by becoming a part time Uber or
ID: 2800110 • Letter: N
Question
Name: ought a $10,000 car to make an extra cash by becoming a part time Uber or Lyft driver. He estimated that he would be driving about 5 miles per trip, and he plans to make 30 trips in a month. Since Tom will be driving only one car, the gas and maintenance costs will be the s, he came out with same if he drives for either Uber or Lyft. After factoring ali possible cost an estimated net income for both companies as: Lyft s 4,500 (first 2 years) $5,500 (third year onwards) Uber Net Income per year 5,000 (a) Determine which option has a shorter payback period at 10% per year. (b) Using the same interest rate, determine which option is more beneficial 5 years from now (n-5).(e) Does the result in Part B correspond with your choice in Part A? Explain the reason for difference, if any.Explanation / Answer
a.) Discounted Cash Flows in Uber = -10,000 5,000/1.10 5,000/1.102 5,000/1.103 ........
= -10,000 4,545.45 4,132.23 3,756.57
Discounted Payback in Uber = 2 + (10,000 - 4545.45 -4132.23)/3756.57 = 2 + 0.35 = 2.35 years
Discounted Cash Flows in Lyft = -10,000 4,500/1.10 4,500/1.102 5,500/1.103 ........
= -10,000 4,090.90 3,719.01 4,132.23
Discounted Payback in Uber = 2 + (10,000 - 4090.90 -3719.01)/4132.23 = 2 + 0.53 = 2.53 years
On comparing, we can say that Uber has a shorter payback.
b.) If the time horizon is 5 years, we will calculate the NPV of each option to calculate net benefits,
NPV for Uber option = -10,000 + 5,000/1.10 + 5,000/1.102 + 5,000/1.103 + 5,000/1.104 + 5,000/1.105
= -10,000 + 4,545.45 + 4,132.23 + 3,756.57 + 3,415.06 + 3,104.60
=$ 8,953.91
NPV for Lyft option = -10,000 + 4,500/1.10 + 4,500/1.102 + 5,500/1.103 + 5,500/1.104 + 5,500/1.105
= -10,000 + 4,090.90 + 3,719.01 + 4,132.23 + 3,756.57 + 3,415.06
=$ 9,113.77
Since, NPV in Lyft is higher, Lyft should be chosen over Uber.
No, the result doesn't correspond with the choice in Part-a. This is because of higher cash flows in case of Lyft in later years, this option becomes more valuable in terms of NPV over a longer horizon period. Though the payback in case of Uber will be realized earlier than that of Lyft but over whole life span, Lyft option will add more value in dollar terms.
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