Question

In: Finance

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?

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 2 years ago

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