Question

19)

The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $900,000. It expects to keep the autos for only two years and to sell them al the end of that period for 60 percent, on average, of what they cost. The plan is to generate $21,000 of incremental revenue per additional auto in each year of operation. The controller estimates that other costs will amount to 20 cents per kilometre on an average of 40,000 kllometres per car per year. She also estimates that the new business will require an investment of $10,000 in additional working capital. The firm is in a 30 percent tax bracket and uses 12 percent as a cost of capital.
a. Calculate the NPV. (Do not round the intermediate calculations. Round the final answer to the nearest whole dollar.
Negative answer should be Indicated by a minus sign. Omit s sign in your response.)
b. Should Elite purchase the automobiles?










• a. a)NPV = -$82,286 ‡ 0.1% and b)NO





• b. a)NPV = $92,386 ‡ 0.1% and b)NO





• c. a)NPV = $82,286 + 0.1% and b)NO





• d. a)NPV = -$72,386 = 0.1% and b)NO





• e. a)NPV = $92,386 ‡ 0.1% and b)Yes





s f. a)NPV = $72,386 ‡ 0.1% and b)Yes





• g. a)NPV = $82,286 ‡ 0.1% and b)Yes





• h. a)NPV = -$82,286 ‡ 0.1% and b)Yes

Answer 1

The NPV for the car rental expansion is -$82,286, indicating that Elite should not purchase the automobiles.

Step-by-step explanation:

To calculate the NPV, we need to calculate the incremental cash flows for each year, discount them back to present value using the cost of capital, and subtract the initial investment.

In this case, the incremental cash flows for each year are $21,000. We need to calculate the present value of these cash flows for two years, which is $38,844. We subtract the initial investment of $900,000 and get a net present value of -$82,286.

Since the NPV is negative, the company should not purchase the automobiles. The negative NPV indicates that the project will not generate enough cash flows to recover the initial investment and provide a return greater than the cost of capital.