3/15/2019 Solved: NPV and APV Zoso is a rental car company that is trying… | Chegg.com
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Corporate Finance with S&P card + Connect Plus (9th Edition)
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Chapter 18, Problem 1QP ON
Problem
NPV and APV Zoso is a rental car company that is trying to determine whether to add 25 cars to
its fleet. The company fully depreciates all its rental cars over five years using the straight-line
method. The new cars are expected to generate $140,000 per year in earnings before taxes and
depreciation for five years. The company is entirely financed by equity and has a 35 percent tax
rate. The required return on the company’s unlevered equity is 13 percent, and the new fleet will
not change the risk of the company?
a. What is the maximum price that the company should be willing to pay for the new fleet of cars
if it remains an all-equity company?
b. Suppose the company can purchase the fleet of cars for $395,000. Additionally, assume the
company can issue $260,000 of five-year, 8 percent debt to finance the project. All principal will
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