Fleet rental car company purchased 10 new cars for a total cost of $ 180,000. Th

Question

Fleet rental car company purchased 10 new cars for a total cost of $ 180,000. The cars generated income of $150,000 per year and incurred operating expenses of $60,000 per year. The company uses MACRS depreciation and its marginal tax rate is 40% (Note: Per IRS regulations, cars have a class life of 5 years). The 10 cars were sold at the end of the third year for a total of $75,000. Assuming a MARR of 10% and using NPW, determine if this was a good investment on an after-tax basis. Contribute by Mukasa Semakula, Wayne State University.

Explanation / Answer

Solution:

144000

Annual Cash Inflow:

Year 0 -180000

Year 1 =(1-0.40)(150000-60000)+36000 =90000

Year 2 =(1-0.400(150000-60000)+57600=111600

Year 3 =(1-0.40)(150000-600000+34560=88560

Year 3 =75000 - 0.40*(75000-51840)=65736

Now NPV of above cash flows=105484.60

So it was a good investment

MACRS depriciation Year Beginning Value Rate Dep End Book value 1 180000 0.2 36000 144000 2

144000

0.32 57600 86400 3 86400 0.192 34560 51840 4 51840 0.1152 20736 31104 5 31104 0.1152 20736 10368 6 10368 0.0576 10368 0 180000

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