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Benton is a rental car company that is trying to determine whether to add 25 cars...

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Finance

Benton is a rental car company that is trying to determinewhether to add 25 cars to its fleet. The company fully depreciatesall its rental cars over four years using the straight-line method.The new cars are expected to generate $240,000 per year in earningsbefore taxes and depreciation for four years. The company isentirely financed by equity and has a 21 percent tax rate. Therequired return on the company’s unlevered equity is 11 percent andthe new fleet will not change the risk of the company.

  

a.

What is the maximum price that the company should be willing topay for the new fleet of cars if it remains an all-equity company?(Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.)

b.Suppose the company can purchase the fleet of cars for$610,000. Additionally, assume the company can issue $340,000 offour-year debt to finance the project at the risk-free rate of 4precent. All principal will be repaid in one balloon payment at theend of the fourth year. What is the APV of the project? (Donot round intermediate calculations and round your answer to 2decimal places, e.g., 32.16.)
a.Maximum price
b.APV

Answer & Explanation Solved by verified expert
3.7 Ratings (313 Votes)
a The maximum price that the company should be willing to pay for the fleet of cars with allequity funding is the price that makes the NPV of the transaction equal to zero Discounting the depreciation tax shield at the riskfree rate the NPV equation for the project is NPV Purchase Price PV1 tCEBTDA PVDepreciation Tax Shield If we let P equal the purchase price of the fleet then the    See Answer
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