Question

Example 5: Breez Scooters wants to place its electric scooters for rent in Waco, The Chief Marketing Officer made a trip to Waco to scout out the territory, spending S4,000 on travel, hotel and meals with the mayor and city council. Based on his report, Breez has decided to move forward. Breez estimates the following for the project: Purchase of 100 scooters $20,000 Purchase and Installation of charging stations Legal fees to local outside counsel for permit Internal Cost to add Waco info to Breez app by existing Breez IT staff $10,000 $100,000 $35,000 Breez's experience is that a 100-scooter fleet generates $880,000 of rental income per year. Hiring contractors to collect and maintain the scooters costs $120,000 per year. Maintenance, replacement costs for the scooters and charging stations, space leases for charging stations, local advertising, sales tax and insurance averages 60% of rental income. The scooters have a short enough life that they are expensed and not depreciated. The charging stations are depreciated over 5 years. Breez's permit to offer the service expires in 4 years, if not renewed by the city council. At the end of 4 years, Breez estimates the charging station equipment will be worth $5,000 and they will have to pay $25,000 to collect all scooters and restore the sites of the charging stations to their original condition. The tax rate is 21%. a. What is the initial cost associated with this project? b. What are the annual after-tax cash flows associated with this project, for years 1 through 3? What is the terminal cash flow in Year 4 i.e., what is the annual after-tax cash flow in Year 4 plus any additional cash flows associated with termination of the project)?

Answer 1

a. Initial Cash flow associated with the project

Travel and Hotel Spending (Sunk Cost) Nil

Purchase of 100 Scooters    $ 20,000

Purchase and Installation of Charging Stations $ 100,000

Legal Fees to Outside Counsel for Permit $ 35,000

Internal Cost to add Breez App $ 10,000 (If this expense is incurring only for new project)

Total Initial Costs $ 165,000

b. Annual After-Tax Cash Flows for year 1 through 3

Description	Working	Amount
Rental Income		$880,000
Less : Hiring Charges to Contractors		$120,000
Less : Maintenance, Taxes and Insurance (60% of Rental Income)	60% of $ 880,000	$528,000
Less : Depreciation on Charging Stations	= $ 100,000/5	$ 20,000
Net Income before taxes		$212,000
Less : Tax at 21%	= $ 212,000 * 21/100	$ 44,520
Annual After-Tax Cash Flow for Year 1 through Year 3		$167,480

c. Terminal cash flow in year 4

Description	Working	Amount
Rental Income		$880,000
Less : Hiring Charges to Contractors		$120,000
Less : Maintenance, Taxes and Insurance (60% of Rental Income)	60% of $ 880,000	$528,000
Less : Depreciation on Charging Stations	= $ 100,000/5	$ 20,000
Add : Realization from Charging station equipment		$ 5,000
Less : Charges for collection and restoration of charging stations		$ 25,000
Net Income before taxes		$192,000
Less : Tax at 21%	= $ 192,000 * 21/100	$ 40,320
Terminal cash flow in year 4		$151,680