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 $4,100 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $29,850 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 $4,800. If your cost of capital is 8 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

cash outflow or initial investment				Year	cost of vans	MACRS rate	Annual depreciation
cost of new vans	5*29850	149250		1	149250	20%	29850
less selling price of old truck	4100*5	20500		2	149250	32%	47760
net cash outflow		128750		3	149250	19.20%	28656
				4	149250	11.52%	17193.6
				5	149250	11.52%	17193.6
Year	0	1	2	3	4	5
initial investment	-128750
before tax cash savings		24000	24000	24000	24000	24000
less depreciation		29850	47760	28656	17193.6	17193.6
before tax cash savings		-5850	-23760	-4656	6806.4	6806.4
less tax-34%		-1989	-8078.4	-1583.04	2314.176	2314.176
after tax cash savings		-3861	-15681.6	-3072.96	4492.224	4492.224
add depreciation		29850	47760	28656	17193.6	17193.6
after tax cash savings		25989	32078.4	25583.04	21685.82	21685.82
tax benefit on loss on disposal of new van						5673.888
cash flow for the project	-128750	25989	32078.4	25583.04	21685.82	27359.71
tax benefit on loss on disposal of new van	book value of machine at the end of 5th year *(1-tax rate)	(149250*5.76%)*(1-0.34)	5673.888