At your trucking firm, the head of operations proposes a 5-year project to buy a new...

At your trucking firm, the head of operations proposes a 5-year project to buy a new fleet of 20 Tesla electric trucks. The trucks will cost $180,000 each and are eligible for bonus depreciation. In 5 years they will have a salvage value of $80,000 each.

The new fleet will save the firm $400,000 per year in fuel costs, but will cost an additional $40,000 per year in maintenance.

If your tax rate is 18% and your discount rate is 12%, what is the project NPV?

Solutions

Expert Solution

Cost of each truck = $180000

Cost of fleet = $180000 * 5 = $900000

Bonus Depreciation in year 1 = 100% * cost of fleet = $900000

Tax Saving on depreciation = 18% * 900000 = $162000

Saving in fuel cost = $400000 each year from year 1 to 5

Additional Maintenance cost = $40000 each year from year 1 to 5

Net cash flow saving = $400000 - $40000 = $360000 each year from year 1 to 5

Hence cash flow of the project

Year	Cost	Cash Flow Saving	Tax Saving	Salvage	Total
0	-900000	0	0	0	-900000
1	0	360000	162000	0	522000
2	0	360000	0	0	360000
3	0	360000	0	0	360000
4	0	360000	0	0	360000
5	0	360000	0	400000	760000

Project NPV at discount rate 12%

= -900000 + 522000/(1+12%) + 360000/(1+12%)^2 + 360000/(1+12%)^3 + 360000/(1+12%)^4 + 760000/(1+12%)^5

= -900000 + 466071.43 + 286989.80 + 256240.89 + 228786.51 + 431244.41

= $769333.04

Hence, NPV of project is $769333.04

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Your firm which is headquartered in US is considering a 5-year international project, an addition of...

Your firm which is headquartered in US is considering a 5-year international project, an addition of new product line to your existing product lines in Europe. The new product line would require a purchase of new equipment with a price of €600,000. The equipment will be depreciated entirely to €0 using straight-line method for 5 years for the tax reporting purpose. The new product line is expected to generate €760,000 for year 1 and to increase its sales at a...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected salvage of the machine at the end of the project is $80,000. The marketing department has forecasted that the company will be able to sell 120,000 units of new product per year at $15 per unit. The production department has indicated that the variable cost per unit will be $6. The company has forecasted that the incremental fixed costs associated with the project are...

Assume that your assigned firm is considering a new 4-year project that would require a $1,000,000...

Assume that your assigned firm is considering a new 4-year project that would require a $1,000,000 initial investment in equipment including shipping and installation. The equipment would be depreciated using 3-year MACRS. 3-year MACRS allows firms to depreciate qualifying assets over four years at rates of 33.33%, 44.45%, 14.81% and 7.41% for years one through four respectively. The equipment can be sold at the end of the project for $250,000. Assume that the project would also require a $100,000 investment...

A developer proposes to construct a new housing project. The relevant data are: Determine the present...

A developer proposes to construct a new housing project. The relevant data are: Determine the present and future peak discharge and total runoff from a 150-mm 24-h storm. If all flow in excess of the present flow must be stored, how much reservoir capacity is required? The average slope is 1 percent. Factor Present Value Future Value Area m2 3.88 x 106 3.88 x 106 CN 80 85 % impervious - 50 % modified - 65

A firm is considering a new project that costs $10,000 that will last 5 years and...

A firm is considering a new project that costs $10,000 that will last 5 years and will have no salvage value. The project would save $3,000 per year in salaries and would be financed with a loan that will accrue interest costs of 15% per year. The firm’s tax rate is 40%, its cost of capital is 20%, and the firm will use the straight-line method of depreciation. What is the NPV of the project? Should the firm invest in...

As an exercise in your human development class, your teacher proposes a new theory of personality...

As an exercise in your human development class, your teacher proposes a new theory of personality development. She states that personality is markedly different in adulthood than in childhood, is completely determined by the environment, and develops pretty much the same across cultures. Describe the three recurring issues in human development and where this new theory stands in relationship to these three issues.

Dye Trucking raised $95 million in new debt and used this to buy back stock. After...

Dye Trucking raised $95 million in new debt and used this to buy back stock. After the recap, Dye's stock price is $9.50. If Dye had 70 million shares of stock before the recap, how many shares does it have after the recap? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number. ? million shares

your firm is evaluting a new capital project. the firm spent 45000 on a market study...

your firm is evaluting a new capital project. the firm spent 45000 on a market study anf 30,000 on consulting three months ago. if the firm approves the project, it will spend 900,000 on new machienry 80,000on installation and 10,000 on shipping. the machien will depreciated via simplified straight line deprecation over its 18 year life. the excepected increase from this new project is 800,000 a year and the expected incremental expenses are 300,000 ayear. in order to start this...

5) Your Company is considering a new project that will require $960,000 of new equipment at...

5) Your Company is considering a new project that will require $960,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $372,000 using straight-line depreciation. The cost of capital is 11%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation (closest to). A) $48,510 B) $24,990 C) $128,602 D) $73,500 6) Your firm...

Taylor Inc. is considering a new project whose data for the first year of operations are...

Taylor Inc. is considering a new project whose data for the first year of operations are shown below. In conducting the capital investment analysis of this project, what would be the project’s Year 1 cash flow? Sales revenues, each year $77,450 Depreciation $9,562 Other operating costs $24,499 Interest expense $8,710 Tax rate 28%

Subjects