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0 Please leave Column A blank as I would like to use it for marking purposes. Barry Cabs is a sole proprietorship that owns and operates one taxi cab. The company purchased its cab 5 years ago for $40,000. When it purchased the cab it expected it to be useful for 8 years with a residual value of $5,000. Barry thinks he could sell the cab today for $14,000. Barry is considering replacing the old cab with a new, all-electric taxi. The all electric car would cost $60,000 and would have an expected useful life of 8 years. Ove 8 year life, the cab would reduce annual operating costs (mostly gas and maintenance) by $8,000 per year for the first 6 years, and $10,000 per year thereafter. Afte years, it is expected the taxi would have a $2,000 residual value. Barry's cost of borrowing is 15% and assume no tax implications. Required: 1 What is the payback period for replacing the exiting cab with the new electric taxi? (2 marks) Payback Period = Years completed + (investment/cash flow) 5.25 Therefore the payback period is approx. 5.25 years 2 What is the net present value of replacing the existing cab with the new electric one? (4 marks) 3 What is the internal rate of return for replacing the existing cab with the new electric one? (2 marks) 4 What is the profitability index for replacing the existing cab with the new electric one? (2 marks) 0 Please leave Column A blank as I would like to use it for marking purposes. Barry Cabs is a sole proprietorship that owns and operates one taxi cab. The company purchased its cab 5 years ago for $40,000. When it purchased the cab it expected it to be useful for 8 years with a residual value of $5,000. Barry thinks he could sell the cab today for $14,000. Barry is considering replacing the old cab with a new, all-electric taxi. The all electric car would cost $60,000 and would have an expected useful life of 8 years. Ove 8 year life, the cab would reduce annual operating costs (mostly gas and maintenance) by $8,000 per year for the first 6 years, and $10,000 per year thereafter. Afte years, it is expected the taxi would have a $2,000 residual value. Barry's cost of borrowing is 15% and assume no tax implications. Required: 1 What is the payback period for replacing the exiting cab with the new electric taxi? (2 marks) Payback Period = Years completed + (investment/cash flow) 5.25 Therefore the payback period is approx. 5.25 years 2 What is the net present value of replacing the existing cab with the new electric one? (4 marks) 3 What is the internal rate of return for replacing the existing cab with the new electric one? (2 marks) 4 What is the profitability index for replacing the existing cab with the new electric one? (2 marks)
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