You are buying a new truck in order to grow your local moving service. The new t

Question

You are buying a new truck in order to grow your local moving service. The new truck costs $37,000. You will need to spend another $6,000 on hitches, ramps, and other special equipment for this use. You will use this truck for 4 years and then you plan that the salvage value will be $8,000. The new truck should increase revenue by 40% over last year's $85,000 revenue. As a result of the truck purchase, operating expenses will increase by $11,000. The depreciation expense will increase by $2500. Your marginal tax rate is 35%.

Explanation / Answer

Income Statement (incremental) Sales ( $ 85000*40%) 34000 Less : operating expenses 11000             Additional depreciation expense 2500             Additional One Time Expenditure on             Account of New Truck 6000 19500 Incremental Profit before Tax 14500 Less : Tax @ 35% 5075 Incremental Profit after Tax 9425 New truck is able to generate additional Income to the company.

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