Question

Suppose a company is considering purchasing one of two alternative delivery trucks. Model X will cost $80,000, will have expenses (excluding depreciation) of $260,000 per year, and will have a useful life of three years. Model Y model will cost $120,000, will have expenses (excluding depreciation) of $250,000 per year, and will have a useful life of four years. Suppose the company uses straight-line deprecation and pays taxes at a 40% rate. The cost of capital for the project is 12%. The salvage values (before tax) are $14,000 for Model X and $20,000 for Model Y. What is the present value of total costs for Model X? (Round to the nearest cent. Enter your answer as a positive number.)

Answer 1

	Computation of present value of total cost of X
	i	ii	iii	iv=ii+iii	v	vi=ii-v	vii	viii=i+vi-vii
Year	Purchase price	Annual cost	Depreciation	Total cost	Tax saving on cost	Post tax cost	Salvage value	total cash outflow
0	80000							80000
1		260000	22,000	282,000	112,800	147,200		147200
2		260000	22,000	282,000	112,800	147,200		147200
3		260000	22,000	282,000	112,800	147,200	14000	133200
Computation of present value
Year	Cost	PVIF @ 12%	Present value
0	80000	1.0000	80,000.00
1	147200	0.8929	131,428.57
2	147200	0.7972	117,346.94
3	133200	0.7118	94,809.13
			423,584.64
PV of cost =		423,584.64