The Road Kind Trucks Analysis - Essay Example

By providing a cheaper means to commute and considering the level of comfort proposed, it would be perfect to exploit the energy situation for the profits to be incurred.

Calculating the cost of capital (WACC):-

Debt ratio                                =          40%

Marginal tax rate                     =          40%

Forecasted average inflation   =         3.50%

Current bond's yield to maturity =      6.50%

Current 10 year treasury notes yield (Fry) = 4%

Market risk premium (Mp)     =          5.50%

Beta (β)                                               =         1.15

Debt ratio (40%)                     =          Total Debt/Total Capital Employed

=          40/100

Total Capital employed                      =          100

Debt capital (D)                      =          40

Equity Capital (E)                   =         60

Cost of debt (kd)                     =          Current yield on bond*(1-tax rate)

=          6.5 %*( 1-40%)

=          3.90%

Cost of equity (Ke)                 =          Rf+ (β*Mp)

=          4 %+( 1.15*5.5%)

=          10.33%

Cost of Capital (WACC) (KO)           =          (Kd*(D/ (D+E))) + (Ke*(E/ (E+D)))

=          (3.9 %*( 40/100)) + (10.33 %*(60/100))

=          7.76%

Cost of capital is therefore      =          7.76%.

CHOICE OF ENGINE:-

Detroit Engine             Marcus Engines

Initial Cost                  20000                         18000

Warranty cost (p.a.)    1000                           1500

Warranty Duration      5 year                         5 year

PV of total cost                       $24,018.09                  $24,027.14

Purchasing a Detroit engine is therefore more economical than purchasing a Marcus engine.

Capital budgeting techniques:-

Buses to be sold                      11000

The selling price per bus               is 220000

Labor cost per bus                  50000

Component and parts per bus 95000

Cost of Engine per bus                       24018.09

The average warranty cost per bus           is 1000.00

Warranty Duration                  5 year

Present value of Average warranty cost 4018.09

We assumed that Road King Trucks preferred a Detroit engine for a Marcus one.

Year    0         1         2         3         4         5         6         7         8         9         10       11        12       13            14       15       16       17       18       19       20

Initial investment $1,000,000,000.00