Group Project
Introduction
You have recently been hired as the CFO of bus company AQR. AQR Inc. is a bus manufacturing company. The company is well known for manufacturing large and reliable bus at a reasonable cost.
One of its greatest achievements is that its buses can be easily modified or customized for different applications.
The company is considering an expansion of its current product line to include transit buses. You feel that due to high gasoline prices, commuters will be more willing to consider using mass transit instead of using their cars to commute to work.
The Decision
AQR's president presented the sales and cost forecasts shown in the attached exhibits. The information presented contains the cost of production, financing information, and warranty cost estimates.
The proposals also contained two engine options for the engines: The Detroit engine, and the Marcus engine. The Detroit engine was more expensive to install, but had a lower warranty cost. The Marcus engine was less expensive to install, but had a higher warranty cost. This begged the question: Which engine should be used?
Issues and Analyses
You noticed that there was a great deal of enthusiasm among the management group about the transit bus opportunity, but your cautious nature told you to also seek a more objective viewpoint.
Consequently, you sought to analyze the proposed project and provide your recommendations directly to CEO. The issues you want to address in your analysis and report are the following:
1) What are the project's cash flows for the next 18 years? What assumptions did you use?
2) What is the company's cost of capital? What is the appropriate discount factor (which may be different) for you to use in evaluating the bus project?
3) If you decide to go ahead with the project, which of the two engines should be used in the bus, and why?
4) Evaluate the quality of the project, by using appropriate capital budgeting techniques.
5) Would you recommend that AQR accept or reject the project? What are the key factors on which you base your recommendation?
Attachment:- Group_Project.rar