Question

A logistics company is deciding between two models of semi-trailer trucks to add to its fleet. The manager has prepared the following information for the economic evaluation. The new trucks are to be used for 7 years and sold for the estimated salvage value. The before-tax MARR is 16.39% per year and the effective tax rate is 39%. Select a machine on the basis of after-tax annual worth analysis using MACRS with a 5-year recovery period.

Alternative                           P1                    P2

First costs                    $245,000         $230,000

Net annual benefits    $155,000         $140,000

Salvage value              $44,500           $37,500

Life, years                           10                    10

Answer 1

This is my answer

Solution :

Alternative 1

Year cash flows Depreciation Profit after tax Profit after tax + depreciation Present value of cash flows
0 ($245,000)
1 155,000 ($49,000.0) 94,550 45,550 39135.66458
2 155,000 ($78,400.00) 94,550 16,150 11921.78239
3 155,000 ($47,040.000) 94,550 47,510 30132.69848
4 155,000 ($28,224.0000) 94,550 66,326 36142.74502
5 155,000 ($28,224.0000) 94,550 66,326 31053.13602
6 155,000 ($14,112.0000) 94,550 80,438 32356.92593
7 199,500 0 121,695 121,695 42059.39852

Net Present value of alternative 1 =- $ 245,000+$222802.35

Net Present value of alternative 1 = -$22,198

Alternative 2

Year cash flows Depreciation Profit after tax Profit after tax + depreciation Present value of cash flows
0 ($230,000)
1 140,000 ($46,000.0) 85,400 39,400 33851.70547
2 140,000 ($73,600.00) 85,400 11,800 8710.652148
3 140,000 ($44,160.000) 85,400 41,240 26156.01947
4 140,000 ($26,496.0000) 85,400 58,904 32098.30613
5 140,000 ($26,496.0000) 85,400 58,904 27578.23364
6 140,000 ($13,248.0000) 85,400 72,152 29023.80615
7 177,500 0 108,275 108,275 37421.26936

194839.9924

($35,160)

Net present value of Alternative 2 = -$230,000+$194,839.99

Net present value of Alternative 2 = -$35,160

By comparing the net present value of both alternatives , alternative 2 is to be selected.

Thank you...