A car rental company is considering purchasing a fleet of 100 vehicles to add to its existing
Question:
A car rental company is considering purchasing a fleet of 100 vehicles to add to its existing fleet of 500 vehicles. The cost of purchasing the new fleet is $2 million, and the expected revenue from renting the new fleet is $1.2 million per year for the next five years. However, there is a 10% chance that a vehicle will be involved in an accident and require repairs costing $2,000 per incident. Additionally, there is a 20% chance that the car rental market will experience a downturn, resulting in a 50% reduction in revenue. The company's cost of capital is 8%.Calculate the expected value, standard deviation, and coefficient of variation of the net present value for the investment, and provide a recommendation to the car rental company based on your calculations.
Note: Assume that all probabilities are independent. Use a discount rate of 8% for all calculations.
Matching Supply with Demand An Introduction to Operations Management
ISBN: 978-0073525204
3rd edition
Authors: Gerard Cachon, Christian Terwiesch