Financial Analysis: Capital Budgeting for Rapid Commuter Bus Service

This report provides a capital budgeting analysis for a proposed commuter bus service, examining its financial viability. The analysis begins by addressing key operational questions, such as demand, costs, and route planning. It then applies quantitative methods, specifically focusing on payback period, Net Present Value (NPV), and Internal Rate of Return (IRR) to evaluate the investment's profitability. The report includes a detailed table outlining the cash flows, revenues, and expenses over an 11-year period, along with calculations for IRR and NPV. The analysis concludes with the determination of whether the project meets the desired 25% rate of return. The student has used the capital budgeting techniques to analyze the provided data to determine the financial viability of the commuter bus service.

Contents
Answer 1.....................................................................................................................................................2
Answer 2.....................................................................................................................................................3
Payback period:.....................................................................................................................................3
Net Present Value (NPV):.....................................................................................................................3
Internal rate of return (IRR):...............................................................................................................3
Answer 3.....................................................................................................................................................4
References...................................................................................................................................................6
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Answer 1
Assuming that I am Kalpana. Following are the questions that that need to be raised answered
minimum fair to charge customers for Rapid to open the commuter bus service.
I. How many people will use the commuter bus service?
II. What will be anticipated daily demand for each of bus trip during the day?
III. How much would be the costs for these buses?
IV. What will happen if the buses are breakdown? What will be used as breakup and what
will this cost?
V. What is fuel cost expected to be?
VI. What will the route be?
VII. How many days a week will the service be in operation?
VIII. How many weeks will the bus service be in operation?
IX. How will the bus be staffed? What will be employee cost?
X. What should the profit/return be for Rapid?
The answer of the questions are as follows,
I. City Valley University’s department of institutional research revealed that 116 faculty
and staff as well as 464 students lived in Midtown. These people were surveyed and an
analysis of the results lead to a projection that approximately 200 would use the
commuter service.
II. Following table shows the daily demand of the buses,
III. A 32-passenger bus can be acquired for $335,000/bus.
IV. If a bus breaks down, RAPID will immediately dispatch a backup bus to the scene. The
cost of dispatching this bus will be $5500, and includes mileage, driver salary, etc.
Busses are well maintained, and this is expected to seldom happen.
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V. The average fuel cost for this year is expected to be $2.18 per gallon. The 32 passenger
bus averages 3.80 miles per gallon.
VI. A daily bus route will be directly from Midtown to Valley University and back to
Midtown, a drive of fifty miles, round trip.
VII. The commuter service will operate 5 days per week, with limited service on Friday.
VIII. The bus service will be in operation when university is open. This would be 15 weeks for
each of the three semesters; total of 45 weeks.
IX. The salary for a bus driver is $36,500 per year, including overtime, shift premiums, and
other costs. It is estimated that this route will use the services of 4 drivers throughout the
year.
X. Given the riskiness and uncertainty involved in this service, RAPID would like to use a
25% rate of return and the project life is set at 11 years.
Answer 2
It is important to use quantitative analysis in order to analyze the data in #1. It is because, all the
information in there is provided by numeric way. Therefore, it could be said that, Capital
budgeting techniques would be the best way to calculate the data in #1.
There are many methods in Capital budgeting. Three of the methods are as follows,
Payback period:
The payback period refers to the amount of time it takes to recover the cost of an investment.
Simply put, the payback period is the length of time an investment reaches a break-even point.
Net Present Value (NPV):
In finance, the net present value or net present worth applies to a series of cash flows occurring
at different times. The present value of a cash flow depends on the interval of time between now
and the cash flow. It also depends on the discount rate. NPV accounts for the time value of
money. An interest rate is needed to determine the present value of future cash flows. Factors
used in determining this rate include the risk of the investment, cost of obtaining funds, etc. A
positive net present value indicates that the present value of the cash inflows exceeds the amount
to be invested, making the investment a desirable investment.
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Internal rate of return (IRR):
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of
a project zero. In other words, it is the expected compound annual rate of return that will be
earned on a project or investment.
Answer 3
Table for Capital budgeting analysis,
Cost of 4, 32 seat
busses
Price of one-way
fare
Total fare revenue
Fuel cost
Maintenance Cost
Dispatch
emergency bus
Driver salary
Net Cash Inflow
Initial
Outla
y
RM1,340,000 (RM1,340,000)
Year
1 RM7.3
6 RM572,976 RM68,412 RM23,200 RM5,500 RM146,000 RM 329,864
2 7.36 572,976 68,412 23,200 5,500 146,000 329,864
3 7.36 572,976 68,412 23,200 5,500 146,000 329,864
4 7.36 572,976 68,412 23,200 5,500 146,000 329,864
5 7.36 572,976 68,412 23,200 5,500 146,000 329,864
6 7.36 572,976 68,412 23,200 5,500 146,000 329,864
7 7.36 572,976 68,412 23,200 5,500 146,000 329,864
8 7.36 572,976 68,412 23,200 5,500 146,000 329,864
9 7.36 572,976 68,412 23,200 5,500 146,000 329,864
10 7.36 572,976 68,412 23,200 5,500 146,000 329,864
11 7.36 572,976 68,412 23,200 5,500 146,000 329,864
i. Internal rate of return: 25%
ii. Net present value: RM 1206115.59 - RM1,340,000 = (RM 133884.41)
iii. Payback: 5th year
iv. RM335,000 x 4 buses = RM1,340,000.
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v. Fares per week can refer Table 4. The calculation is like these 1,730 fares per week x 45
weeks’ x RM7.36 = RM572,976.
vi. Miles driven per year refer to Table 5 as the calculation to be 119,250 miles / 3.8mpg =
31,382 gallons; 31,382 gallons’ x RM 2.18 = RM68,412.
vii. RM 5,800 per bus x 4 buses = RM 23,200.
viii. RM 36,500 salary x 4 = RM146,000.
ix. Total fare revenue is the amount entered into the “Price of one-way fare” column x 1,730
fares x 45 weeks. Enter dollar amounts into the “Price of one-way fare” column until
IRR is 25% and NPV is just below zero.
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References
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press.
Hillier, D., 2016. Corporate Finance: European Edition (UK Higher Education Business Finance). Berkshire:
Mcgrewhill.
Terence, T., 2018. Corporate Finance: The Basics. Oxon: Apex.
Warner, S. & Hussain, S., 2017. The Finance Book: Understand the numbers even if you're not a finance
professional. London: FT Publishing.
Watson, D. & Head, A., 2013. Corporate Finance: Principles and Practice. Harlow: Pearson.
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