Question

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.)

Answer 1

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