Mr. Ali wants to start “Rent-A-Car” business. He wants to start this business with at least 20 cars. He estimates that the needed investment for the business is Rs. 30 Million. He projects that revenue (before depreciation and tax) from the business will be Rs. 6 Million for the first year and it will keep on growing at a rate of 5% annually until the 10th year.

Some other information regarding the project is as follows:  

i) Annual depreciation will be Rs. 3 Million under the straight line method. 
ii) Cost of capital is 10% while the rate of tax is 35%. 

Assume you are running a financial consultancy firm; Mr. Ali wants to get his project evaluated through your firm. You have to recommend Mr. Ali about the feasibility of the project after applying different capital budgeting techniques.

Requirement:

Keeping your task in consideration, give answers to the subsequent: 

1.  find out net cash flows for 10 years.                      
2.  Evaluate the project by using the following capital budgeting methods: 

a. Payback Period (The desired payback period is 5 years)              
b. Net Present Value             
c. Profitability Index             

3.  Is there any contradiction between the results of above used methods? What would be your final suggestion about the acceptance or rejection of the project? Support your suggestion with financial rationale.         

SOLUTION GUIDELINES:

Please read the subsequent instructions carefully before making the assignment solution:

i) Do prepare the solution after completely reading and understanding the problems. 
ii) Put your authentic efforts in order to understand the concepts thoroughly. 
iii) Give whole calculations first two parts of the problem.

FORMATTING GUIDELINES:

i) Use the font style “Arial” or “Times New Roman” and font size “12”. 
ii) It is advised to prepare your document in MS-Word format. 
iii) You might also compose your assignment in Open Office format. 
iv) Use black and blue font colors only.