You and your business partners are considering a car rental business. You expect startup costs to...

 

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You and your business partners are considering a car rental business. You expect startup costs to be $X,XXX,XXX (where this figure is the same as the last seven digits in your WSU student ID number). In equipment that is depreciable on a seven-year MACRS schedule. You plan to start and operate the business for six years, and at the end of which time you expect to sell all the equipment for $X,XXX,XXX plus $150,000. You have to prepare an additional $30,000 as the working capital for this new business and recycle the working capital at the end of the project. You expect the revenue in the first year to be $300,000, and that revenue will increase by 15% per year. You project annual fixed operating expenses of $75,000 in the first year. These fixed expenses will grow by 5% per year. Your annual variable operating costs are expected to be 40% of revenue. You expect to pay taxes of 15%. Assume your required return is 8%. Prepare an excel spreadsheet to respond to the following prompts: 1. Prepare pro forma income statements and operating cash flow projections. (20%) 2. Estimate the total cash flows from asset/project for this opportunity. (Hint: Complete the CFFA table. In other words, calculate the OCF, NCS, and change in NWC.) (20%) 3. Estimate the opportunity's NPV. Would you start up this business line in the baseline situation? (Hint: Is the project's NPV>0?) (10%) 4. Sensitivity Analysis: what happens to cash flows and NPV if the revenue is 15% more than expected. What if the revenue is 15% less than expected? Would you launch this project after the sensitivity analysis? (Hint: Compare the NPVs you got and respond with a short answer. If yes, why? If no, why not?) (25%) You and your business partners are considering a car rental business. You expect startup costs to be $X,XXX,XXX (where this figure is the same as the last seven digits in your WSU student ID number). In equipment that is depreciable on a seven-year MACRS schedule. You plan to start and operate the business for six years, and at the end of which time you expect to sell all the equipment for $X,XXX,XXX plus $150,000. You have to prepare an additional $30,000 as the working capital for this new business and recycle the working capital at the end of the project. You expect the revenue in the first year to be $300,000, and that revenue will increase by 15% per year. You project annual fixed operating expenses of $75,000 in the first year. These fixed expenses will grow by 5% per year. Your annual variable operating costs are expected to be 40% of revenue. You expect to pay taxes of 15%. Assume your required return is 8%. Prepare an excel spreadsheet to respond to the following prompts: 1. Prepare pro forma income statements and operating cash flow projections. (20%) 2. Estimate the total cash flows from asset/project for this opportunity. (Hint: Complete the CFFA table. In other words, calculate the OCF, NCS, and change in NWC.) (20%) 3. Estimate the opportunity's NPV. Would you start up this business line in the baseline situation? (Hint: Is the project's NPV>0?) (10%) 4. Sensitivity Analysis: what happens to cash flows and NPV if the revenue is 15% more than expected. What if the revenue is 15% less than expected? Would you launch this project after the sensitivity analysis? (Hint: Compare the NPVs you got and respond with a short answer. If yes, why? If no, why not?) (25%)