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Higher Colleges of Technology BUS 2303-Financial management Case Study-Capital budgeting Capital Budgeting Case Study - School for Advanced Studies A...

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Higher Colleges of Technology BUS 2303-Financial management Case Study-Capital budgeting 1 Capital Budgeting Case Study – School for Advanced Studies A private school is considering investing in its own transport fleet (School buses). Currently, the transportation has been contracted to an outside organization. The initial cost of the transport fleet would be AED 600 000. The life of the transport fleet would be five years, after which time the vehicles would have to be scrapped with no salvage value. The management has come up with the following Revenues and Cost data for the next five years. Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 300,000 330,000 350,000 380,000 400,000 Drivers' Costs 33,000 35,000 36,000 38,000 40,000 Repairs & maintenance 8,000 13,000 15,000 16,000 18,000 Other Costs 130,000 135,000 140,000 136,000 142,000 Depreciation 120,000 120,000 120,000 120,000 120,000 To raise funds for the project your company is proposing to raise a long-term loan at 12% interest rate per annum. You are told that there is an alternative project that could be invested in using the funds which has the following projected results: Payback period = 3 years Accounting rate of return = 30% Net present value = AED140 000. As funds are limited, investment can only be made in one project. Note: The transport fleet would be purchased at the beginning of the project and all other expenditure would be incurred at the end of each relevant year. Required: 1. Prepare a table showing the net cash flows over the life of the transport fleet project. 2. Calculate the following for the transport fleet project: (i) Payback period (ii) Accounting rate of return (iii) Net present value 3. Write a short memo to the Investment Manager in your company explaining whether the company should invest in the transport fleet project or choose the alternative project available. You must clearly explain the reasons for your decision.
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Solution.xlsx

Solution
Part ( 1 ) Year 0 Year 1 Initial cost
Revenues
Less Expenses
Drivers cost
Repairs and Maintenance
Other Cost
Total Cost
Net Cash flows ( Amounts in AED)
Year 2
Year 3 Year 4 Year 5...

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