Question
In: Accounting
You run a plumbing company. You are experiencing a growth in your business, and find you...
You run a plumbing company. You are experiencing a growth in your business, and find you don't have enough trucks and plumbers to meet the demand. You are considering buying a new truck and then hiring an additional plumber to handle some of the work you have had to turn away. Based on the assumptions below, prepare a Capital Budgeting Analysis using the template provided. Assume you will sell the truck at the end of year 3.
| Cost of the Truck | $35,000.00 |
| Truck Modifications | $4,000.00 |
| Sales Tax on Truck | $2,750.00 |
| Depreciation Method | Straight Line |
| Useful Life of Truck in Years | 5 |
| Revenues | $100,000.00 |
| Plumber Wages | $55,000.00 |
| Gas for Truck | $5,000.00 |
| Insurance for Truck | $750.00 |
| Maintenance for Truck | $1,200.00 |
| Plumbing Supplies | $5,000.00 |
| Sale Price of Truck | $20,000.00 |
| Company Tax Rate | 35.00% |
| NPV Discount Rate | 7.00% |
What is the Capital Investment / Depreciable Basis?
What is the Book Value at the end of Year 2?
What is the Operating Cash Flow for Year 1?
What is the Salvage Value?
What is the Net Present Value (NPV)?
Solutions
Expert Solution
| Capital Investment/Depreciable basis (A) | 41,750 | |||
| Book Value at the end of year 2 (F) | 25,050 | |||
| Operating cash flows at year 1 (I) | 24,700 | |||
| Salvage value of truck at year 3 (G) | 17,269 | |||
| NPV (H-A) | 17,652 | |||
| Workings | ||||
| Initial Investment | ||||
| Cost of truck | 35,000 | |||
| Truck modifications | 4,000 | |||
| Sales tax on truck | 2,750 | |||
| Capital Investment/Depreciable basis (A) | 41,750 | |||
| Assuming salvage | 0% | |||
| Useful life (B) | 5 | |||
| Depreciation p.a. (A/B) | 8350 | |||
| Year | 1 | 2 | 3 | Total |
| Revenue | 100,000 | 100,000 | 100,000 | 300,000 |
| Total Income (C) | 100,000 | 100,000 | 100,000 | 300,000 |
| Plumber wages | 55,000 | 55,000 | 55,000 | 165,000 |
| Gas for truck | 5,000 | 5,000 | 5,000 | 15,000 |
| Insurance for truck | 750 | 750 | 750 | 2,250 |
| Maintenance for truck | 1,200 | 1,200 | 1,200 | 3,600 |
| Plumbing supplies | 5,000 | 5,000 | 5,000 | 15,000 |
| Depreciation | 8,350 | 8,350 | 8,350 | 25,050 |
| Total costs (D) | 75,300 | 75,300 | 75,300 | 225,900 |
| PBT (C-D) | 24,700 | 24,700 | 24,700 | 74,100 |
| Tax (PBT * 35%) | 8,645 | 8,645 | 8,645 | 25,935 |
| PAT (I) | 16,055 | 16,055 | 16,055 | 48,165 |
| PVIF @ 7% | 0.93 | 0.87 | 0.82 | 2.62 |
| Present value (E) | 15,005 | 14,023 | 13,106 | 42,133 |
| Book value of asset at year 2 | ||||
| Initial Investment (A) | 41,750 | |||
| Depreciation (8350*3) | 16,700 | |||
| Book Value at the end of year 2 (F) | 25,050 | |||
| Book value of asset at year 3 | ||||
| Initial Investment (A) | 41,750 | |||
| Depreciation (8350*3) | (25,050) | |||
| Net Book Value | 16,700 | |||
| Sale price | 20,000 | |||
| Loss on sale of asset | (3,300) | |||
| Tax saving on loss (Loss * 35%) | (1,155) | |||
| Sale price | (20,000) | |||
| Benefit derived from sale of asset | 21,155 | |||
| PVIF | 0.82 | |||
| Salvage value of truck at year 3 (G) | 17,269 | |||
| NPV of the project = Present value of net cash flows - Initial Investments | ||||
| Present value of net cash flows | ||||
| PV of operational profits (E) | 42,133 | |||
| PV of sale of truck (G) | 17,269 | |||
| Present value of net cash flows (H) | 59,402 | |||
| Initial Investment (A) | 41,750 | |||
| NPV (H-A) | 17,652 | |||
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