Submitted by: Submitted by randog97
Views: 624
Words: 763
Pages: 4
Category: Business and Industry
Date Submitted: 05/19/2013 11:50 AM
Current Energy Cost
Road King Trucks is a truck manufacturing company that is contemplating on creating a public transit bus. The CEO of Road King Trucks recognizes an opportunity to build public transit buses because of the rise in fuel prices and the congestion on the roads as well as with mounting parking fees. If gas prices continue to rise like they have over the past couple of years, many individuals will look for alternative transportation. If high quality public transportation is available to targeted riders, the transition will be that much easier.
Cash Flows
This project will reach a positive cash flow by the third year of operation which is when the production and sales begin (See figures 1&2). For years 0-2, cash outflow of 1.1 billion is invested in the plant, equipment, and training. Beginning in year 4 until year 22, an annual inflation factor of 3.5% was added to the price per bus as well as all expenses with the exception of depreciation which is a non inflationary number. Straightline depreciation will be used in years 3-22 to depreciate the construction of the factory and the necessary equipment needed to produce the buses.
After analyzing the cash flows of the Marcus engine and the Detroit engine, the Net Present Value is $1,897,513,000 and $1,863,448 respectively. Utilizing the Marcus engine provides a $4,065,000 greater NPV. Year 22 yields a substantial increase in cash by adding both the operating cash flow and the working capital together and then deducting the net salvage value of the property.
Cost of Capital
The cost of capital is highly important in determining the economic feasibility of this expansion opportunity. We determined the Weighted Average Cost of Capital (WACC)(Figure 3) to be the appropriate discount factor for this project. The WACC is the weighted average expected cost for the company's obligations such as debt, preferred stock, and common stock which are issued by the corporation to finance its operations...