Road Truck Kings

Summary Results

A. For Each Year

1. Revenue: $2,420,000,000

2. Variable costs

a. Labor cost per bus: $50,000

b. Parts cost per bus: $95,000

c. Engine costs per bus (2 options)

a. Detroit: $23,973

b. Marcus: $23,960

3. SG&A costs: $250,000,000

4. Warranty costs

a. Bus: $3,974

b. Engine (2 options)

a. Detroit: $3,973

b. Marcus: $5,960

5. Depreciation: $50,000,000

6. Working Capital needs (10% of Sales): $242,000,000

B. Project Related

1. Investment costs: $1,000,000,000

2. Land: $6,000,000 ($12,789,069 at time of sale)

3. Clean up costs: $300,000

4. Salvage costs: $15,000,000

C. Cost of Capital

1. Appropriate cost of capital for this project (WACC): 8.18%

D. Net Present Value: $232,861,857

E. Internal Rate of Return: 10.20%

Road King Trucks Report

Importance of the Energy Cost Situation

The energy cost situation is an important factor that should be taken into consideration when it comes to deciding whether or not Road King Trucks should accept the transit bus project. Experts interviewed by various reputable news reporters such as CNN believe that gas prices are expected to rise as the years pass by which will increase the demand for public transportation. As the demand for public transportation increases, the demand for transit buses will increase which is where Road King Trucks comes in. The bus project is dependent on whether or not the demand for public transportation increases as a result of rising energy costs; if energy costs increase like they are expected to, becoming involved in manufacturing transit buses would be profitable for Road King Trucks.

Project's Cash Flows and Assumptions Used

The project's cash flows for the next twenty years are listed on page 2 of the spreadsheets. The assumptions that were used in calculating the project's cash flows are that the price per bus, units sold per year, labor cost per bus, and price of the components and parts are going to be constant for the next twenty years. We also assume that we are going to sell the land for its current value plus the inflationary effects on its price, the equipment will be sold for the salvage value listed in table 9, and the clean-up costs will be the amount listed in table 9.

Company's Cost of Capital and the Appropriate Discount Factor

The company's cost of capital is the cost of debt plus the cost