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 $4,900 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $48,000 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 $5,600 each. If your cost of capital is 10 percent and your firm faces a 30 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.)

	Year 0 1 2 3 4 5 6 FCF

Answer 1

cash flow :

Year 0

First we need to find the Cash flow of year 0. there is a sale of Old vans for $24,500 (4900X5). it is fully depreciated hence its book value will be zero. The difference between book value and sale value will be a gain subject to 30% tax. The Net of tax sale proceeds will be a cash inflow.

There will be an outflow to the extent of $ 240,000 (48000X5) - towards purchase of new vans.

Years 1 to 6

There is pre tax cash savings of $ 5,600 per year per truck.so total cash savings will be =$ 28,000 ( 5600X5)   p.a. After tax cash flow of this saving will be an inflow. after tax cash flow is,

After tax CF =   Before Tax CF X (   1   -   tax rate)

Depreciation is calculated at the MACRS rates for each year on the cost of 240,000. The Tax benefit on account of depreciation will be a cash inflow. The value of it is computed each year by using the formula,

Tax benefit on depreciation =    Depreciation   X Tax Rate%

Accordingly cash flows are computed,

excel formulas