Your company is contemplating replacing their current fleet of delivery vehicles
ID: 2767638 • Letter: Y
Question
Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,000 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $29,850 each in the configuration you want them, and can be depreciated using MACRS over a 5-year life. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $3,700 each. If your cost of capital is 8 percent and your firm faces a 34 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.)
Explanation / Answer
Calculation of cash flows for the project :
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Sale value of old Vans Net of tax (5 Vans * $3000)*(1-34%) (A)
$ 9,900.00
Cost of New NV vans (5 Vans * $29850) (B)
$(149,250.00)
Expected yearly After-tax cash savings =3700* (1-34%)= (C)
$ 2,442.00
$ 2,442.00
$ 2,442.00
$ 2,442.00
$ 2,442.00
Tax Saving on depreciation:
MACRS Depreciation Rate
$ 0.20
$ 0.32
$ 0.19
$ 0.12
$ 0.12
Depreciation = Cost * Depreciation rate =
$ 29,850.00
$ 47,760.00
$ 28,656.00
$ 17,193.60
$ 17,193.60
(149250*20%)
(149250*20%)
(149250*20%)
(149250*20%)
(149250*20%)
Tax Saving on depreciation = Depreciation * 34% (D)
$ 10,149.00
$ 16,238.40
$ 9,743.04
$ 5,845.82
$ 5,845.82
Net Cash Flows
$(139,350.00)
$ 12,591.00
$ 18,680.40
$ 12,185.04
$ 8,287.82
$ 8,287.82
Calculation of cash flows for the project :
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Sale value of old Vans Net of tax (5 Vans * $3000)*(1-34%) (A)
$ 9,900.00
Cost of New NV vans (5 Vans * $29850) (B)
$(149,250.00)
Expected yearly After-tax cash savings =3700* (1-34%)= (C)
$ 2,442.00
$ 2,442.00
$ 2,442.00
$ 2,442.00
$ 2,442.00
Tax Saving on depreciation:
MACRS Depreciation Rate
$ 0.20
$ 0.32
$ 0.19
$ 0.12
$ 0.12
Depreciation = Cost * Depreciation rate =
$ 29,850.00
$ 47,760.00
$ 28,656.00
$ 17,193.60
$ 17,193.60
(149250*20%)
(149250*20%)
(149250*20%)
(149250*20%)
(149250*20%)
Tax Saving on depreciation = Depreciation * 34% (D)
$ 10,149.00
$ 16,238.40
$ 9,743.04
$ 5,845.82
$ 5,845.82
Net Cash Flows
$(139,350.00)
$ 12,591.00
$ 18,680.40
$ 12,185.04
$ 8,287.82
$ 8,287.82
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