Assignment Details
Jak E Cab is an innovator and entrepreneur with an extensive knowledge of road networks in his city – Alima. He has approached you seeking help in working through some budget options and for advice on what course of action he should take with starting and growing his new taxi company – Jak eCabs. Jak plans to develop an e-Taxi Fleet in Alima.
Jak wants you to do some work around capital budgeting to help decide on which cab to buy and to do some breakeven analysis, budgeted financial statements (P&L, B/Sheet and Cashflows) and ratio analysis.
The attached Excel file provides some raw data and suggested worksheets associated with several possible scenarios. Information and assumptions are provided below.
Scenario One (Jak eCabs Commences)
For comparative purposes and starting in 2025, Jak wants you to provide advice on the basis of acquiring one taxi only.
Jak eCabs will start trading on the 1st January 2025, with Jak depositing $80,000 of his own money into Jak eCab’s bank account with HSBC.
Jak is looking to buy one eCab for Jak eCabs to operate and has a choice between a BYD and a Tesla. Unfortunately, strict regulations will only allow Jak eCABS to use the car for 5 years. The BYD costs $40,000 and has an estimated residual of 25%. The Tesla costs $55,000 and has an estimated residual of 35%. The car will be depreciated on a straight-line basis. Assume Jak eCABS purchased the car on the 1st of January 2025. Jak needs your advice on which car would be the best option for Jak eCabs.
Because Jak eCabs has limited cash reserves, they will need to borrow the full amount to buy either car. HSBC is prepared to lend them the money with a very special 5-year interest-only loan at 6% p.a. interest to be paid on the first day of each month in arrears (i.e. January interest will be paid on 1st February) with the principal to be repaid at the end of the 5-year term. You can assume the loan will be renegotiated at the end of the 5-year term.
Revenue consists of passenger fares only. Fares consist of a ‘Flag-Fall’ (the base amount you pay regardless of distance) of $6.00 and a $5.00 fee for every kilometre travelled. The car has on average 25 fares per day and is expected to travel 100,000km each year with paying passengers 80% of the time. Annual inflation is estimated at 3.5% and the discount rate is estimated to be 7%.
The operating costs of the cars include electricity, maintenance costs, insurance, registration, wages and other costs as outlined below. Please note these costs are for 2025 and so you will need to decide which costs will increase with inflation and those that will not change.
Charging Costs. Jak eCabs has managed to arrange an electricity account with Zapp, a nationwide EV charging company, and pays its account on the first of the month following the end of each quarter. The BYD is not as efficient as the Tesla and the charging costs per kilometre are estimated to be 6 cents and 5 cents respectively.
Maintenance is required every 25,000 Km for the BYD and every 33,000km for the Tesla. Costs for the BYD are $300 per service whilst costs for the Tesla are 200 per and are paid when they fall due.
Insurance for the BYD costs $3,500 and $4,000 for the Tesla. Insurance is renegotiated and paid for at the end of every year. Note the insurance for 2025 will be paid in January 2025 and the insurance for 2026 will be paid in December 2025.
Annual Motor Vehicle Registration is paid yearly in advance. Registration for 2025 will be paid in January and registration for the following years will be paid on the last day of the previous year.
Wages are paid monthly in arrears at the beginning of each month i.e. the January wages are paid in February. The drivers are employed on a casual basis and are paid $35 per hour for a 12 hr shift. The cars run 24 hours per day, 7 days per week. For 48 weeks per year. The other four weeks are for maintenance and vacation for Jak E Cab.
Administration includes all other costs associated with administering the business such as casual wages for an assistant, stationery, and other costs. These currently amount to $2,500 per month and are paid at the end of each month.
An Advertising agreement was signed by Jak eCabs for $6,000 p.a. and paid for three months in advance on the first day. Subsequent advertising payments are made in advance on the last day of each quarter. In the last quarter of the fifth year, Jak eCabs negotiated a new five-year agreement for $9,000 p.a payable quarterly in advance.
Annual Taxi Fees of $3,000 are paid by Jak eCabs to a major taxi company to operate the radios, communication and navigation systems and other services. These costs are paid in arrears at the end of each month.
All the information is summarised in the Raw Data Sheet on the attached Excel Spreadsheet.
Scenario Two (Star Gazer)
Given the potential high demand for Jak eCabs, Jak wants to aim for the stars and go BIG! Jak asks you to consider the implications of Jak eCabs buying one additional new car at the start of each year for the five years. You only need to use information relevant to the car that gave Jak eCabs the highest NPV in the above scenario – it would be silly to include information about the car that does not have as high an NPV.
Some things to consider. Although Inflation is 3.5%, the cost of each new Car will rise by 5% each year. Jak eCabs also wants to know if they will have enough cash to pay back the loan for the first car and how they will finance the second car. However, if they pay out the loan for the first car, they will need to have a minimum cash balance at the start of year two of $100,000.
You will also need to analyse the revenue and operating costs to see if they will increase with proportionately with each new car and by how much, or if you would expect it would be the same as having only one car. Remember to include Inflation where necessary. You must state your assumptions.
Required:
1. For Scenario One, use the attached Excel file to:
a. Prepare a Capital Budget and advise Jak which car he should buy to operate for Jak eCabs. Use the amounts from your Cash Flow Statements.
b. Prepare annual budgeted income statements (P&L) for 5 years for both cars. Which car has the highest profit? Would this change your advice to Jak about which car to buy and why?
c. Prepare a breakeven analysis for both cars for the first year. What would be the minimum number of trips they need to make and breakeven? What is the minimum breakeven profit per kilometre? What would happen if the average occupancy fell to 70%? What would happen if the fare was $5.50 per kilometre?
d. Prepare budgeted Cash flows for the 5 years for both cars. Which car provides the greater cash flows?
e. Prepare budgeted Balance Sheets for 5 years for both cars. At the end of the five years, which car would provide the highest net equity?
f. Prepare Ratio Analysis for the 5 years for both cars. Comment on each of the ratios and discuss the overall profitability, liquidity, efficiency and capital structure for both cars. Based on your analysis, advise which car is best and why.
2. For Scenario Two, use the attached Excel file to:
a. Prepare annual budgeted income statements (P&L) for the first 5 years for your chosen car, using the same assumptions as scenario one.