Jim Krakauer proposes to expand his restaurant supply business by adding an HVAC repair unit. Currently his customers, almost all restaurant owners, buy or order equipment from his sow room floor or from a warehouse of used equipment located behind his store. His new business would include a adding a fleet of ten cargo vans outfitted to the gills with shelving, tools, testing equipment and replacement parts. They would be driven by licensed HVACs capable of repairing everything from walk-in refrigerators to gas-fired stoves to the air conditioning system. The fleet of trucks itself would cost $500,000 and the cost of modifying them would be $600,000. Both of these costs are depreciable. Most truck fleet owners sell their trucks after they have been fully depreciated but Krakauer does not want to have his company’s logo on trucks that are old and beat up. His plan is to operate the fleet for five years only and then sell them at the end of five years. The entire depreciable amount would fall into the MACRS Five Year Class Life which extends beyond five years. Because the sale would be before they are fully deprecated some of the gain would be shielded from taxes by the residual book value. He hopes he can get a salvage value from the sale of the fleet in the amount of $90,000
Krakauer anticipates revenues of $2,300,000 per year from the venture. Operating costs (i.e. cost of goods sold) including driver/HVACs wages and the after-market parts sold to customers would amount to $1,839,600 per year. He expects his receivables period will be 45 days of sales; inventories on the trucks would amount to 30 days of operating costs and his business pays its bills to vendors on average 22 days after receiving delivery so the payables period would be 22 days on a cost of goods sold basis. His cost of capital is 12% and his tax rate (state, local, federal) is 33.33%
Evaluate this proposal using the capital budgeting criteria, NPV, IRR, MIRR, PI, Payback and Discounted Payback.
Please solve in Excel format