Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. Visby learns that a competitor is thinking of offering similar services, thus reducing Visby's sales. By how much could sales fall before the net present value (NPV) was zero, given that the cost of capital is 8%, and that cost of goods sold is 45% of revenues?

Question

Quizplus · Accepted Answer

D) Using a financial calculator, CF0 = -325,000, CF1 = 221,000, F1 = 3;
calculate NPV at 8% = $244,538.43;
using TVM keys, PV = 244,538.43, N = 3, I = 8, compute PMT = $94,889.1063;
pre-tax EBIT = $94,889.1063 / 0.65 = $145,983.24;
change in revenue incorporating cost of goods sold = $145,983.24 / 0.55 = $265,424.074;
percentage change = 265,424.074 / $475,000 = 56%

Visby Rides, a Livery Car Company, Is Considering Buying Some