A private school is considering the purchase of six school buses to transport students to and from school events. The initial cost of the buses is $600,000. The life of each bus is estimated to be five years, after which time the vehicles would have to be scrapped with no salvage value. The school's management team has derived the following estimates for annual revenues and cost for the next five years:
yr.1 yr.2 yr.3 yr.4 yr.5
Revenues: $330,000 $330,000 $350,000 $380,000 $400,000
Driver Costs 33,000 35,000 36,000 38,000 40,000
Repairs & Maint. 8,000 13,000 15,000 16,000 18,000
Other Costs 130,000 135,000 140,000 136,000 142,000
Annual Depreciat. 120,000 120,000 120,000 120,000 120,000
The buses would be purchased at the beginning of the project (i.e., in year 0), and all revenues and expenditures shown in table above would be incurred at the end of each revelant year. The schools are exempt from taxes, the school's corporate tax rate is 0 percent. A business consultant has advised management that they should use a weighted average cost of capital (WACC) of 10.5 percent to evaluate this project. 1) prepare a table showing estimated net cash flows for each year of the project, explaining all steps involved in calculating year 1 estimated net cash flow. 2) Calculate the payback period, explaining steps; 3) Calculate the project's internal rate of return (IRR), explaining all steps involved in calculating process; 4) Calculate the project's net present value (NPV), explaining all steps. 4) Which of the three evaluation techniques computed (i.e., payback period, IRR and NPV), should the firm use to make its decision of whether or not to accept this project? and Why? and Is one of these techniques better than the others? if so, why? What are some of the risk factors inherent in this capital budgeting analysis? List at least 3 items that could cause the outcome of this project to be substantially worse than management currently expects (as reflected in their revenue and cost estimates, WACC estimates), explain each of the risk factors identified.