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MM Group is a rental car company that is trying to determine whether to add...

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Finance

MM Group is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $175,000 per year in earnings before taxes and depreciation for five years. The company is entirely financed by equity and has a 35 percent tax rate. The required return on the companys unlevered equity is 13 percent, and the new fleet will not change the risk of the company. Depreciation tax shield is treated as riskless; the risk-free rate is 8%

a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company?

b. If the company can purchase the fleet of cars for $480,000 and can issue $390,000 of five-year, 8 percent debt to finance the project. All principal will be repaid in one balloon payment at the end of the fifth year. What is the adjusted present value (APV) of the project?

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