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 | |||
ekkarill92 answered 9 months agoRelated Solutions
Your organization is experiencing tremendous growth and based on your projections you will need to hire...
Your organization is experiencing tremendous growth and based on
your projections you will need to hire an additional 5 managers in
the upcoming year. You would like to fill these positions
internally. For this assignment you will be required to do the
following:
1. Create an organization of your choice and explain the mission,
vision and values of the organization.
2. Create a job description for the manager position.
3. Create an internal replacement chart that will identify a
minimum...
Rob operates a small plumbing supplies business as a sole proprietor. In 2018, the plumbing business...
Rob operates a small
plumbing supplies business as a sole proprietor. In 2018, the
plumbing business has gross business income of $421,000 and
business expenses of $267,000, including wages paid of $58,000. The
business sold some land that had been held for investment
generating a long-term capital gain of $15,000. The business has
$300,000 of qualified business property in 2018. Rob's wife, Marie,
has wage income of $250,000. They jointly sold stocks in 2018 and
generated a long-term capital gain...
You work as a wholesale person for a plumbing company. One of your customers, a contractor...
You work as a wholesale person for a plumbing company. One of
your customers, a contractor has an open line of credit with your
company for $10,000 worth of products He is currently at his limit;
however, he is not overdue. He has just received word that he has
been awarded a $40,000 plumbing contract at the local airport. The
contract requires he supply $9,000 worth of plumbing products. Your
customer does not have the cash to pay for the...
You work as a wholesale person for a plumbing company. One of your customers, a contractor...
You work as a wholesale person for a plumbing company. One of
your customers, a contractor has an open line of credit with your
company for $10,000 worth of products He is currently at his limit;
however, he is not overdue. He has just received word that he has
been awarded a $40,000 plumbing contract at the local airport. The
contract requires he supply $9,000 worth of plumbing products. Your
customer does not have the cash to pay for the...
Your client is looking to start a plumbing and heating business and is looking for advice...
Your client is looking to start a plumbing and heating business
and is looking for advice on how to structure this new business
entity. He will be the only employee and plans to purchase a van
and basic tools to get started. What questions do you need to ask,
and what are the major considerations that the client should make
with respect to tax, ease of operation, future additional owners,
and liability protection? Be sure to include which business form...
1. Athens Book Nook is experiencing flat sales growth and seeks to grow the business. A...
1. Athens Book Nook is experiencing flat sales growth and seeks
to grow the business. A proposed project will add a coffee shop to
the store. The goal is to create extra book sales by bringing more
customers into the store.
The cost of the coffee shop investment will be $250,000 today.
The store estimates that the cash flows from ONLY the coffee shop
will be $30,000 per year (after-tax cash flows) over a 11-year
project period.
The owners of...
Bramble Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an...
Bramble Company, a manufacturer of ballet shoes, is experiencing
a period of sustained growth. In an effort to expand its production
capacity to meet the increased demand for its product, the company
recently made several acquisitions of plant and equipment. Rob
Joffrey, newly hired in the position of fixed-asset accountant,
requested that Danny Nolte, Bramble’s controller, review the
following transactions.
Transaction 1: On June 1, 2017, Bramble Company purchased
equipment from Wyandot Corporation. Bramble issued a $30,800,
4-year, zero-interest-bearing note...
______ 6. You are trying to decide whether to run your business as a corporation or...
______
6. You are trying to decide whether
to run your business as a corporation or as an individual owner
(for example, as a “sole proprietorship”). One of the factors is
the problem of double taxation. Assume that the corporate income
tax rate is 35%, the individual income tax rate on dividend income
is 15%, and the individual income tax rate on other income is
39.6%. (Note – use these tax rates. Don’t use the actual tax rate
schedule.) The...
Jac Flyhigh is Chair of the Board of Exeed Company. The company has been experiencing growth...
Jac Flyhigh is Chair of the Board of Exeed Company. The company
has been experiencing growth placing a strain on finances and
increasing levels of risk. Despite having put in place a budget
that predicted a profit of $1m, expenditure has blown out over the
year and the company is potentially going to record a loss of
$360,000. In order to be able to report a profit to shareholders
the Chief Financial Officer is proposing that the company recognise
additional...
Cash Flow Budgeting - Company A is experiencing rapid growth due to the popularity of its...
Cash Flow Budgeting - Company A is experiencing rapid growth due
to the popularity of its recent hardware release. Current sales of
$100,000, which increased from $80,000 the previous month, are
expected to grow at a 30% rate. Cost of sales are stable 70% of
sales revene, yielding a 30% gross profit. Company A sales are 15%
for cash with the remaining 85% collected the following month.
Inventory-on-hand is maintained at a level to support the following
month's sales. Inventory...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Cost of Production Report Hana Coffee Company roasts and packs coffee beans. The process begins by...
- C++ Task: You are to write a class called Monomial, using filenames monomial.h and monomial.cpp, that...
- Partial Pressure/Total Pressure Question Consider the equation: (CH3)2N2H2(l) + 2N2O4(l) ---> 3N2(g) + 4H2O(g) + 2CO2(g)...
- Can you show how to do this step by step using Matlab please. Write a function...
- Plaintiff died of gas asphyxiation when he entered a sewer tunnel without a mask to answer...
- Retail Co has a unique set of HR practices. Describe and evaluate how you think the...
- Discuss some of the ways artists experimented with new styles and techniques, and how these differed...
ADVERTISEMENT