Corporate Finance: Capital Budgeting and Cash Flow Analysis

BAP53- CORPORATE FINANCE

Table of Contents
Introduction and Background......................................................................................................................3
Discussion and Analysis...............................................................................................................................3

Introduction and Background
In the given case, a company is considering if it should be entering the discount used rental car
market. It is proposed to have a total of 100 used, late-model, mid-sized cars which would be
having the price of $9500 each. Different aspects of capital budgeting and the cash flow has been
considered for evaluating the case (Alexander, 2016).
Discussion and Analysis
Decision making activity is an essential phase that an organization goes through to make sound
financial decisions for its betterment and growth. ACE is considering two options: buying mid-
sized cars and continuing its operations or leasing the land to an outsider (Choy, 2018).
a. The initial cash flow for the project that ACE would have to incur would be $ 1050000.
purchase of cars 950000
add: installation of recovery systems 100000
Fixed Asset Expenditure 1050000
b. Relevant costs are those expenditures that help an organization make better decisions by
eliminating unnecessary complicated data. The cost of installing the LoJack system is
relevant to this project since it is specifically incurred for discounted rental car project
and hence, would not be incurred otherwise.
c. Irrelevant costs are those expenditures that do not hold any importance in the process of
decision making undertaken by the management of the organization. Here, ACE shall
have to bear the maintenance costs irrespective of nay of its decisions. Hence, these are
considered to be irrelevant.
d. Change in working capital states the increase in current assets vs., the current liabilities.
Here, there has been an increase in the entity’s working capital which shall form a part of
initial investment and shall be released at the end of year 5.