Capital Budgeting SOLVE WITHOUT EXCEL
Sal Enterprises is a local taxi company run by a sole proprietor, Sal Goodman. The firm is looking to invest in new air-conditioning filters. The company has narrowed it down to two products, the Jerry and the Yin. The following is some information on these filters.
Jerry:
Purchase 100 at $50,000 per unit
Maintenance costs: $6,000/year
Ben believes he can sell the filters at $5,000 per unit at the end of its 10-year life.
Yin:
Purchase 90 at $80,000 per unit
Maintenance costs: $6,000/year
Sal believes he can sell the filters at $10,000 per unit at the end of its 15-year life.
Sal heard about you, the senior consultant at UFC, through his good friend, Conor Mcgregor. As such, Sal Goodman has approached you for help. Sal’s expertise lies in good looks, not financial investments, therefore the owner is indifferent about either filter.
CCA = 20% Tc = 40% Opportunity cost: 12%
a) Which product will you recommend?
b) Now assume Sal has a few loyal customers who use his services regularly (you know who you are) regardless of price. This gives Sal a steady stream of revenues. How much revenue will Sal Goodman need to earn annually to break even after factoring in the required rate of return (i.e; NPV = 0)
c) Forget about part (b). Assume the company is bidding for the filters, what is the maximum price the firm should pay for each option?