Question

In: Finance

Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You...

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 $3,400 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $33,000 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 $4,100 each. If your cost of capital is 12 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.)

Solutions

Expert Solution

Statement showing depreciation

Year Opening balance Depreciation Rates Depreciation
(purchase price x Depreciation rates)
Closing Balance
1 165000 20% 33000 132000
2 132000 32% 52800 79200
3 79200 19.20% 31680 47520
4 47520 11.52% 19008 28512
5 28512 11.52% 19008 9504
6 9504 5.76% 9504 0

Statement showing cash flow

Particulars 0 1 2 3 4 5 6
Purchase price of Nissan NV vans
(5 x 33000)
-165000
Salvage value of old Van
(5 x 3400) (1-tax rate)
=17000 (1-0.34)
=17000(0.66)
=11220
11220
Yearly before-tax cash savings
(4100 x 5)
20500 20500 20500 20500 20500 20500
Depreciation -33000 -52800 -31680 -19008 -19008 -9504
PBT -12500 -32300 -11180 1492 1492 10996
Tax @ 34% 4250 10982 3801 -507 -507 -3739
PAT -8250 -21318 -7379 985 985 7257
Add: Depreciation 33000 52800 31680 19008 19008 9504
Annual cash flow 24750 31482 24301 19993 19993 16761
Total cash flow -153780 24750 31482 24301 19993 19993 16761

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