Bob\'s Taxi Co. is considering adding 5 taxis to its fleet. It can either purcha
ID: 2781173 • Letter: B
Question
Bob's Taxi Co. is considering adding 5 taxis to its fleet. It can either purchase or lease the taxis. If purchased, each taxi has an initial cost of $18,000; annual O&M; costs of $3,750, and a salvage value of $3,000. Taxis qualify as 3-yr property. If the taxis are leased, beginning-of-year payments of 5,900/taxi, plus operating costs of $1,800/taxi, will be incurred. The taxis will bring in $45,000 in total revenue a year. Using a 5-yr planning horizon, a 40% tax rate, a 10% ATMARR, and a Pw analysis, should the trucks be purchased or leased? Please show before tax cash flow, depreciation amount, taxable income, and taxes paid, after tax cash flow for each year and PW for each option 4)Explanation / Answer
Option 1- Purchase
Net operating margin = 45000-3750 = 41250
The NPV is computed below
The NPV of option 2 is as follows
Operating margin= 45000-1800 = 43200 per annum
Note that the lease payments are at beginning of the period while the revenues and operating costs are at end of period.
The NPV is as follows
NPV = $83,495.87
** NPV is computed using the excel function as = NPV(10%, cash flows 1-5)+cash flow of year 0
** Since the npv of leasing is higher, the trucks should be leased.
Option 1- Purchase Year Initial cost/Salvage Operating Margin Depreciation Net operating income= Operating Margin- Depreciation Tax Add back depreciation Salvage value post tax= 3000*(1-0.4) Net cash flows 0 -18000 -18000 1 41250 -5999.4 35250.6 -14100.2 5999.4 27149.76 2 41250 -8001 33249 -13299.6 8001 27950.4 3 41250 -2665.8 38584.2 -15433.7 2665.8 25816.32 4 41250 -1333.8 39916.2 -15966.5 1333.8 25283.52 5 41250 41250 -16500 0 1800 26550 NPV $ 82,931.73