Project: using debt and equity; one-year taxi investment with simple Risk Analysis.
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end.
The firm is contemplating the following:
Vehicle acquisition cost $ 30,000
Years of useful life (economic life) XXXXXXXXXX
Tax rate XXXXXXXXXX%
Required rate of return on equity XXXXXXXXXX%
Required return on debt XXXXXXXXXX%
Debt ratio XXXXXXXXXX%
Annual revenues $ 145,000
Operating expenses (excluding depreciation) $ 100,000
Tips:
1.Depreciate straight-line over the year of useful life, down to $0 over one year. Assume Market value of vehicle = Book value of vehicle.
2. The maximum dividend is paid at year end.
3. Ignore any working capital effects.
4. Capital charge will be based on the assets at the beginning of each year.
Please include in the analysis:
Part A:
1. P&L
1. OCF analysis
1. EVA analysis
1. Does this project deserve consideration?
1. What is the WACC?
1. What is the NPV of this investment?
1. What is the project’s IRR?
1. Report how many dollars are distributed at year end to:
XXXXXXXXXXa. To debt holder: principal and interest
. To tax authority
c. To shareholde
1. What is the shareholder's total rate of return? What is base case operating margin?
1. Part B: PROJECT RISK ANALYSIS (sensitivity to base case assumptions): using base case sales, and 9.5% operating margin, and also 10.5% operating margin; Do likewise using base case values; with sales 5% lower than base case, and also 5% higher than base case. Report the highest NPV and the lowest NPV values. How different are these than the base case NPV?
Sheet1
Car cost (investment at 0) 30,000 Taxi Project
Useful life (years) 2
Tax rate 0
Required equity return 10% Annual Depreciation 15,000
Each year, for two years $ yr 1 yr 2
Revenue 128,000 XXXXXXXXXXOCF = EBIT (1-t XXXXXXXXXXDep
Opexp XXXXXXXXXXOCF = 13,000 + 15,000 = 28,000 28,000
Dep 15,000
SG&A 0 "Invest $30,000, OCF=$28,000 each year, for two years"
Driver + gas 100,000
Total 115,000
yr 1 yr 2
EBIT 13,000 XXXXXXXXXXEVA = XXXXXXXXXXEBIT(1-t) - capital charge
Interest 0 XXXXXXXXXXEVA= 13,000 - 3,000 = 10,000 11,500
EBT 13,000
Tax 0 "Invest $30,000. Year 2 Assets = 15,000 after depreciation"
NI 13,000
Total 0 1 2
EVA analysis EVA = 10,000 11,500
PV of EVAs 18,595 9,091 9,504
OCF analysis
OCF = 28,000 28,000
PV of OCFs 48,595 25,455 23,140
Investment at 0 30,000
PV less investment 18,595
Sheet1
Scenarios
XXXXXXXXXXOp Margin
Scenario 0.12 0.15 0.17
($0.05) 764,498 1,018,000 1,188,247
If all FX rates base 847,895 1,113,517 1,290,599
$0.05 931,292 1,208,000 1,392,950
NPV for alternative scenarios
0.12
($0.05) base $0.05 764498 847895 931292 0.15
($0.05) base $0.05 1018000 1113517 1208000 0.17
($0.05) base $0.05 1188247 1290599 1392950
($0.05) base $0.05
Sheet2
NPV for alternative scenarios
0.12
($0.05) base $0.05 764498 847895 931292 0.15
($0.05) base $0.05 1018000 1113517 1208000 0.17
($0.05) base $0.05 1188247 1290599 1392950
($0.05) base $0.05