A private school is considering the purchase of six school busesto transport students to and from school events. The initial costof the buses is $600,000. The life of each bus is estimated to be 5years, after which time the vehicles would have to be scrapped withno salvage value. The school’s management team has derived thefollowing estimates for annual revenues and cost for the next 5years.

	Year 1	Year 2	Year 3	Year 4	Year 5
Revenue	330,000	330,000	350,000	380,000	400,000
Driver Cost	33,000	35,000	36,000	38,000	40,000
Repairs	8,000	13,000	15,000	16,000	18,000
Other cost	130,000	135,000	140,000	136,000	142,000
Annual Depreciation	120,000	120,000	120,000	120,000	120,000

The buses would be purchased at the beginning of the project(i.e., in Year 0) and all revenues and expenditures shown in thetable above would be incurred at the end of each relevant year.

Because schools are exempt from taxes, the school’s corporatetax rate is 0 percent. A business consultant has advised managementthat they should use a weighted average cost of capital (WACC) of10.5% to evaluate this project.

• Prepare a table showing the estimated net cash flows for eachyear of the project. Explain all steps involved in your calculationof the Year 1 estimated net cash flow.
• Calculate the project’s Payback Period. Explain in your ownwords, all steps involved in the calculation process.
• Calculate the project’s Internal Rate of Return (IRR). Explainin your own words, all steps involved in the calculationprocess.
• Calculate the project’s Net Present Value (NPV). Explain inyour own words, all steps involved in the calculation process.

Which of the three evaluation techniques that you computed(i.e., payback period, IRR and NPV), should the firm use to makeits decision of whether or not to accept this project? Why did youchoose this technique? Is one of these techniques better than theothers and if so, why?

Finally, what are some risk factors inherent in this capitalbudgeting analysis? Make a list of at least three items that couldcause the outcome of this project to be substantially worse thanmanagement currently expects (as reflected in their revenue andcost estimates, WACC estimate, etc.). Fully explain each of therisk factors you identify.