finance

The introduction

This report is to help the Tasmanian motor rental (tmr) is set up as a proprietary company in car rental industry and is conceding whether to ether the discount rental car market Tasmanian.

Project costs

The estimated all the cash flows and inflows related to the project need to be identified such as cash inflows and outflows related to the project that need to be identified taken into consideration.

Tmrs initial cash outlay are the of acquiring the vehicles (100) cost of this is (1500000) the lojack stolen vehicle recovery systems installation costs ($150000), the building renovation and redevelop costs for both building is ($215,000), the cost of market of ($30000) and the initial networking capital of ($150000). The interim operating cash flows are the all the revenue projections for the projects life (5,5000,000), the total variable costs ($550,000), the all the fixed costs are (9000,000), the costs of the administrative ($3,330,000)

, the total tax on profits ($264,000) and the all the depreciation of the cars ($1,650,000).

The project incremental cash flow takes away any such costs that is not related to this project such as annual maintenance costs of $25000 for both bulling as side on the project information sheet. The maintained costs is know as suck cost in this project , because this cost id already happened regardless of I we take this project or not , the maintence cost are not incremental cash flow making this as from the acceptance of the investment. Tmr will spend money on maintenance and the cost cannot be recovered.

Marketing costs of 30000

At time 0 there are some cash flows may incur in the initial cash outlay period, including the

The capital expenditures

This is including the cost of the purchasing the 100 cars at price of 1500000 and 215 000 for redevelop and renovate for both location and net working capital of 150000 and initial working capital: the cash outflow will typically be recovered in full at the end of the project that is at end of 5 year and the net working capital only be recovered at end of year 5.

Q2. The opportunity costs and cannibalisation, the opportunity cost

TMR need to understand the possible Opportunity costs to not understand the project and possible cannibalisation costs to understand the project in its decision making. So if TMR disused to undertake the project there is a fall in its regular car rental business of 20,000 per year. If the fall in 20,000 happened it is considered as an cannibalisation cost because offering the new discount rental car business in Tasmania that would draw sales away from the original car rental business. The op cost of not able to undertaking the given project is the 90,000 for leasing the lots to an auto-repair company.

Q3. Determine the initial investment cash flow

The inertial cash flow is the cash flows that are used in investment are buying the to 100 cars price of average price of 15,000 and also the investment in recovery system installed cost them 1,500 per car making the total of 150,000 and the investment of the net working capital of 150,000.

Q4. To estimate the cash flows associated with the project over 5 years , there are four steps to this first one bring the estimating projects operating cash flows and then step two is calculating projects working capital requirement , step three being the calculating project capital expenditure ( initial investment) and the lst one bring the calculating projects free cash flows. As talked about the frist step that was used to find out the ofcs. So over the five years the cfo is , year two was -164,875 , year two was 317,625 , year three was -280,500 , year four was -317,625 and last year was -317,625.

Step two is related to the working capital relates to day to day activities of rims and mainly includes current assets ( cash , inventories and receivables ) and current liabilities ( payables) when the firm invest in new projects ,sales will generally increase which may lead to an increase in account receivable and inventories , we have 150,000 in net working capital will be required.

Step three is related to the capital expenditure requirements in our case is the cars , the preaching the 1000 car at price of 1500000 to be used in the project and the developed and renovate also requirement that will cost 215,000 and the working capital of the 150000 This is including the cost of the purchasing the 100 cars at price of 1500000 and 215 000 for redevelop and renovate for both location and net working capital ofinitial working capital: the cash outflow will typically be recovered in full at the end of the project that is at end of 5 year and the net working capital only be recovered at end of year 5.

Step four is related to the calculating the project free cash flows , so this project at year 0 has -2045,000.00 , then we calculating the all the free cash flows for 5 years time , so at year 1 the free cash flows was the -247,575 , year two was -18,075 , year three was 77,550 , year four was 249,675 and the last year was 399,675 making the total free cash flows of 158,750.

q5. the project payback period is really imported because it tell us the length of time required for an investment to recover its initial outlay in terms of profits or savings. Assuming the business could be sold at the end of the five years for 1 million. This includes the vale of the car fleet , premises and capital gain from the business. After calculating the all the free cash flows and subtract it from the expenses happened at the year 0 that is total of -2015,000.00 and this have to be payed by end of year 5 or before. So after taking all the free cash flows for each year , there are as followed year one -285,825 , year 2 is -56,325, year three is 77,550 , year four 249,675 and the year five 399,675 , by using the payback period method this project will payback its costs that happened at year 0 the results show the company would not able to pay back the expenses that happened due to not able to generate the high amount of free cash flows , after even adding the that 1 million to the fiveth payed its still giving give the negative numbers , that means the company has not payed of there expenses that happened in year 0.

Q6. Finding the npv

The is net presented value of all the cash flows (with inflows being positive cash flows and outflows being negative), which means that the NPV can be considered a formula for revenues minus costs. If NPV is positive, that means that the value of the revenues (cash inflows) is greater than the costs (cash outflows). The npv from this project as followed year one -255,201 year 2 is -44901.95, year three is 55198.558 , year four 158672,98 and the year five 794213.18, and the total npv is -1,307,018.12 so this cash flows indicate that first two year the cash flows were negative then next three years were the

Positive. This also shows the business has not payed there expenses over 5 years, even adding the 1 millions dollars at year 5 , didn’t make any difference .

Q7. The use of sensitivity analysis recalculates npv using the scenario of a decrease in project sales by 10 % annually. This decrease has not affected the npv in positive way. for example before this decrease free cash flow for year was -255,201 and after this decrease it is -369073.6607 so by looking ta this resulted it shows the increase in npv after this decrease in revenue was placed in the project. For year two we see increase of -164869 from -44901 and for year three there is decrease in cash flow from 55198 to -34645 , the year four cash flow was 158672 now it is 67515 so it has gone down for year four and year five cash flow before was 794213 now it is 712823 so there is a decrease in this cash flow so the sensitivity analysis demonstrates that sales are highly sensitive to changes in free cash flows.

concision

the overall conclusion by looking at answers from the questions 5 and 7 , these are used as a example to help TMR management as to whether they should go ahead with the investment project or not.

Revenue		830,000	1030,000	1080,000	1,230,000	1,230,000	5,4000,000
Less tax dedication from marketing costs		-30,000	-30,000
Cost of good sold (10% of revenue)		($83,000)	(103,000)	(108,000)	(123,000)	(123000)	540,000
Cash operating expense		($870,000)	(870,000)	(840,000)	(840,000)	(840,000)	4,260,000
Depreciation (1,650,000/5)		($330,000)	(330,000)	(330,000)	(330,000)	(330,000)	1,650,000
Operating profit		-453,000	-273,000	-198,000	-63,000	(63,000)	1,050,000
Tax ( %27.5)		-124,575	75,075	-54,450	17,325	17,325	288,750
+ depreciation		330,000	330,000	330,000	330,000	330,000	1650,000
= OCF		-247,575	-18,075	77,550	249,675	249,675	311,250
- cost of purchasing the cars	(1650,000)						1,650,000
Marketing costs	(30,000)
Cost of redevelopment and removing	(215,000)
Increase In net work capital	(150,000)					150,000
Tax deduction marketing costs	30,000.00						1,58,750
Free cash flow	-2,015,000.00	-285,825	-56,325	77,550	249,675	399,675	1,630,250

Year o

Year 1

Year 2

Year 3

Year 4

5

Total

Payback period

Payback pried
years	Project cash flow	accumulated
0	-2,015,000	-2,015,000
1	-285,825	-2,300,825
2	-56,325	-2,357,150
3	77,550	-2,279,600
4	249,675	-2,029,925
5	1,399,675	-630,250
Total		-630,250
year 0 , and still cash flow is mot big infa to pay it back on time

The net present value

Years 0	-2,015,000.00
Year 1	-255,201
Year 2	-44901.95
Year 3	55198.558
Year4	158672.976
Year5	794213.18
total	-1,307,018.12

Npv of sensitivity test

Year0	-2,015,000.00
Year 1	-369073.6607
Year 2	-164869.6588
Year 3	-34645.90356
Year 4	67515.85185
Year 5	71`2823.1784
total	-1803,250.19