A local delivery company has purchased a delivery truck for $20,000. The truck w

Question

A local delivery company has purchased a delivery truck for $20,000. The truck will be depreciated under MACRS as a five-year property. The trucks market value (salvage value) is expected to decrease by $2,300 per year. It is expected that the purchase of the truck will increase its revenue by $20,000 annually. The O&M costs are expected to be $4,600 per year. The firm is in the 40% tax bracket, and its MARR is 12.3%. If the company plans to keep the truck only two years, what is the net present worth?

Explanation / Answer

Cash inflow = (Revenue - Costs) * (1 - Tax )+ Depreciation * Tax rate

Year 1 = (20000 - 4600) * (1-40%) + 20000 *20% *40% = 10840

Year 2 = (20000 - 4600) * (1-40%) + 20000 *32% *40% = 11800

Book value at end of 2 years = 20000 * (100% -20% -32%) = 9600

Market value at end of 2 years = 20000 - 2300 - 2300 = 15400

Cash fow from disposal = 15400 - 40% * (15400 -9600) = 13080

PV of cash inflow = 10840 / (1+12.3%)^1 + (11800+13080)/(1+12.3%)^2 = 29381.07

Net present value = 29381.07 - 20000 = 9381.07

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