Capital Budgeting Analysis Data Analysis Chapter

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Hay Taxi should replace the new vehicles after five years. This decision comes about after a capital budgeting analysis that illustrates the different possible scenarios for replacing the vehicles. A net present value calculation was done for each scenario to determine which scenario delivered the highest total net present value over the next six years for the Hay Taxi company. There is little difference between replacing the vehicles after year six, but year five yields a slightly better net present value. It is not recommended that the vehicles are replaced any earlier than this.

The heart of the methodology is the net present value analysis. The net present value calculation takes into account all of the incremental cash flows to this decision. The cash flows in question are the cost of the vehicles, their salvage value, the cost of replacing the batteries should the cars be kept long enough to warrant doing so, the annual maintenance, the tax savings from the depreciation expense and the revenue that the new cabs will generate.

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The revenue is incremental because our current fleet must be replaced -- we could also choose to shut down the company.

An individual net present value calculation was conducted for each scenario. The following scenarios were tested: Replace the cars after the each year of use, after every other year, after every third year, every fourth year, fifth year and sixth year. By law, the cars must be removed from the fleet after six-year, so these six options are the only one possible.

The net present value was calculated on the basis of a 10% discount rate, and a 30% tax rate as basic assumptions. Revenue was assumed to be $180 per annum with operating expenses of $130,000 per annum.….....

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