Finance (Article Sample)

Student’s Name
Professor’s Name
Course
Date
King Road Trucks
QUESTION 1
The energy cost situation is very important since it is the determinant of whether the transit buses project will be carried out or not. Fall in energy cost will mean the project will not be viable and will not be carried out. In this case, it seems the energy cost will be going up for a long time facilitating the carrying out of the transit buses project. The high cost will cause the commuters to leave their personal cars at home and use the communal means which is far much cheaper. Therefore, the firm must invest in this project and the sooner, the better before the competitors dominate the market.
QUESTION 2
Road King trucks limited
Cash flow statement
Indirect method
The cash flow amount for each of the twenty years is expected to be $ 2,608.30 million per year.
Assumptions
* The cash flow amount is the same for the twenty years.
* The expenses do not increase or decrease in the next twenty years.
* It is assumed that payment is made, and cash becomes available immediately after the sales are made.
* The suppliers are paid their funds once they make the delivery of the inputs.
QUESTION 3
The formula for the cost of capital is given by:-
WACC=Weight of equity*cost of equity*weight of debt*cost of debt
=E/V*Re +D/V*Rd(1-T)
D/V =represents debt/total value=0.2857
E/V=represents equity /total value=0.7143
Re=represesnts firms cost of equity=10.33%
Rd=3.90%
Rd=represents Returns on the firms’ debt financing
WACC=0.7143*10.33%+0.2857*3.90=7.38%+1.11%=8.49%
The appropriate discount factor for use in the project is given by the following formula shown below:-
Discount factor=1/ (1+r) t
= 1/ (1+0.065)20=0.2838=28.38%
QUESTION 4
Detroit engines dollars Marcus Engines Dollars value
Cost of engine 20,000 cost of engine 18,000
Annual warranty costs (5 years) 5,000 annual warranty cost (5 years) 7,500
Total cost 25,000 total cost 25,500
The firm should install the Detroit engines on the buses. Though their cost is higher in terms of their price and installation cost than the Marcus engines, the overall cost is lower after warranty cost incorporation. The cost of Detroit is $25,000 while Marcus is costing $25,500.The cost of Marcus is higher by $500.
QUESTION 5
The method of capital budgeting in this project is the net present value. There is the assumption of the cash flow per year being even for the 20 years the business will be in operation.
Net present value=R*[1-(1+i)-n]/I – initial investment
R=net cash flow for each period=$2,608.30
I =required rate of return for each period=6.5%
n=number of periods the project is expected to be operational=20 years
Initial investment=$400 million+$6million=$406 million
Net present value=2,608.30*[1-(1+0.065)-20]/0.065 - 406=$28,333.5725 Million
Question 5
Looking at the overall cost of producing the buses
Dollars (000,000) Dollars (000,000)
Selling price of each bus ($220,000*11,000) $ 2,420
Less
Labor cost per bus (11,000*50,000) ($550)
Component s and parts (11,000*95,000) ($1,045)
Selling and administrative expenses ($250)
Warranty cost per year per bus ($11)
Engine cost (Detroit) ($231) ($2,087)
Profit $ 333
The firm should accept the project because of several reasons
* The project has a positive returns
* The fuel prices increase being experienced in these cities will be a long term problem for the motorists, the prices will not be going down soon.
* The parking fees have increased, and people will, therefore, prefer to use public means
* The municipal councils have been campaigning for the residents to using public means of transport due to the congestion private transport causes.
After the above computation, I would recommend the firm to start the project. There are various factors in the market that shows the project will be a viable both in short and long term. It is, therefore, an opportunity the firm should take into consideration and invest in it. The net cash flow of the project is positive. The firm will be receiving 2,608.30 million dollars every year as returns on the project. The county council of these cities had been campaigning that the motorists need to use the public means of transport in order to ease congestion in the city. There is likely hood these campaigns will soon get implemented into law and motorists will not be allowed to use their private cars for business activities. The authority will only allow them to use during weekends and when they are doing shopping.
Some of the motorists are finding the parking fees to be very high, and they would, therefore, prefer to use the public transport. The parking spaces are continually becoming scarce, and the residents will not have places to park their vehicles. They will turn to the public means of transport. Soon most of the residents will be forced to leave their cars at home due to the lack of spaces to park their vehicle. The large number of vehicles on the roads has contributed to the environment degradation. Most of the residents have become environmentally conscious, and they would prefer to preserve the environment by reducing the amount of emissions made. Emission reduction will happen when the number of vehicles on the road is reduced. The rising oil prices are discouraging the residents from using their vehicles to work. The only available alternative would be to turn to the public transport.
Only the lack of reliable means of public transport is causing the above instances not to be implemented. When they become available, the commuters will be very much willing to use instead of their vehicles because of being cost effective.
The firm is already producing school buses and in the 1950’s they accounted for 50% of its revenue. Based on the historical data that is available in the firm, there is much hope that the firms buses will be performing very well in the market just like the school buses. The firm already has a good reputation in the market of producing quality buses. Therefore, the commuter buses penetration in the market will not be hard, and the residents will accept them easily. To make them more unique and distinct from what other competitors are offering, there are several features the firm intends to add. The Road King Trucks plans to incorporate features like air conditioning, efficiency, and increased level of comfort. The uniqueness will just increase their demand among the commuters.
The firm can enjoy economies of scale since their cost of production is low. The firm does not have to go for a new frame that can be expensive but will use the current frames used to make the trucks. The cost of modifying the frame is very low. They already have the necessary equipment to make the buses from the school buses businesses.
APPENDICES
Exhibit 1: Sales and Cost Forecast
The sales forecast is based on projected levels of demand. All the numbers are expressed in today’s dollars. The forecasted average inflation per year is 2.0%
.
Price per bus

$220,000



Units sold per year

11,000



Labor cost per bus

$50,000



Components & Parts

$95,000



Selling General & Administrative

$250,000,000



NOTE: Average warranty cost per year per bus for the first five years is $1,000. The present value of this cost will be used as a cost figure for each bus. Afterwards, the bus operator will become responsible the repairs on the buses.

The buses can be produced for twenty years. Afterwards, the designs become obsolete.

Engine choices
Engine

Detroit engines

Marcus engines

Price per engine, including installation

$20,000

$18,000

Average annual warranty cost per year for five years. Afterwards, the bus operator will become responsible for the repairs on the buses.*

$1,000

$1,500

The chosen engine will be installed in every bus and will become a cost figure for each bus.
NOTE: The engine manufacturers are not providing Road King Trucks with any warranty. However, Road King Trucks will provide a warranty to its customers. After the initial five years, the bus operators may purchase an extended warranty from any insurance company that offers such packag...