Question

"A local delivery company has purchased a delivery truck for $22,000. The truck will be depreciated under MACRS as a five-year property. The trucks market value (salvage value) is expected to decrease by $2,000 per year. It is expected that the purchase of the truck will increase its revenue by $11,000 annually. The O&M costs are expected to be $4,800 per year. The firm is in the 40% tax bracket, and its MARR is 13.7%. If the company plans to keep the truck only two years, what is the net present worth?"

Answer 1

Depreciation would be computed for two years, for first year it is 20% of 22000 which is 4400 and for the second year it havled due to half year convention at 32%*22000/2 = 3520

Annual Revenue is 11000 and annual cost is 4800. Salvage value (after 2 years) is 22000 - 2000*2 = 18000.

This gives taxable incomes of 11000 - (4800 + 4400) = 1800 for year 1 and 11000 - (4800 + 3520) =2680 for year 2. This is taxed at 40% and its 60% becomes net income which is 1080 and 1608 for the two years

Book value at the end of two years is 22000 - 4400 - 3520 = 14080 and salvage value is 18000. Thus, capital gain is 3920 and capital gain tax is 1568. Hence the second year net capital gain is 3920 - 1568 = 2352

This gives the net cash flows as

Year 0, -22000, year 1 5480 and year 2 21560

Net PW = -22000 + 5480*(1+13.7%)^-1 + 21560*(1 + 13.7%)^-2

= -502.92

Year		0	1	2
Income statement
Revenues			11000	11000
Expenses
O&M			4800	4800
Depreciation			4400	3520
Taxable income			1800	2680
Income tax			720	1072
Net income			1080	1608
Cash flow statement
Operating activities
Net income			1080	1608
Depreciation			4400	3520
Investment activities
Investment		-22000
Salvage				18000
Gains tax				-1568
Net cash flow		-22000	5480	21560