Question 1 - Crown Limousine Service is considering acquisition of an additional vehicle. The model under consideration will cost $80,000, have a 5 year life and a $20,000 residual value. The company anticipates that the effect on annual net income will be as follows:
Revenue $109,500
Less expenses:
Driver 60,000
Fuel 3,750
Maintenance 1,600
Insurance 1,500
Depreciation 12,000
Miscellaneous 1,000
Total expense 79,850
Income before taxes 29,650
Taxes at 40% 11,860
Net Income 17,790
Required: Calculate the Net Present Value of the investment assuming the company has a required rate of return of 14 percent. Should the company invest in the new limousine?
Question 2 - Case Study
Stan Mayfield, president of Mayfield Software, is interested in acquiring a used aircraft to facilitate business travel. The aircraft he is interested in will cost $ 1,000,000. It has a five life with an anticipated residual value of $ 600,000.
Mayfield estimates that he and four other executives each take 100 trips per year at a cost of $550 per trip (they fly first class and, often, two or more of the executives fly together). The costs are expected to increase at 4 percent per year.
If Mayfield buys the plane, a pilot will be hired at a cost of $85,000 per year. Fuel, maintenance, insurance and other operating costs will be $330,000 per year. This includes $80,000 of depreciation, but excludes the pilot's salary. The pilot's salary and operating costs (other than depreciation) will increase at 4 percent per year due to general inflation.
Mayfield values the time he and other executives will save using a company plane at $500 per trip per person. He believes that the value of executive time will increase at least as fast as general inflation. The company tax rate is 40 percent and its required rate of return is 10 percent.
Required: Analyze the investment in the plane.