Brock Florist Company buys a new delivery truck for $29,000. It is classified as a light-duty...

Brock Florist Company buys a new delivery truck for $29,000. It is classified as a light-duty truck. Brock is in a 30% tax bracket and has a cost of capital of 8%. Assume that Brock will sell its delivery truck after three years of service for $15,000. a. Calculate the NPV of the equipment purchase using a five-year life with straight-line depreciation to zero salvage. b. Calculate the NPV of the equipment purchase using a five-year life and MACRS depreciation. c. Which of the two depreciation methods would Brock prefer?

Year	3-year Class	5-year Class	7-year Class
1	33.33%	20.00%	14.29%
2	44.45%	32.00%	24.49%
3	14.81%	19.20%	17.49%
4	7.41%	11.52%	12.49%
5		11.52%	8.93%
6		5.76%	8.92%
7			8.93%
8			4.46%

Expert Solution

Answer a
Calculation of NPV of the equipment purchase using a five-year life with straight-line depreciation to zero salvage.
Year	0	1	2	3	NPV
Purchase cost of new delivery truck	-$29,000.00
Depreciation tax shield		$1,740.00	$1,740.00	$1,740.00
After tax sale value of delivery truck				$13,980.00
Net Cash flow	-$29,000.00	$1,740.00	$1,740.00	$15,720.00
x Discount factor @ 8%	1	0.925925926	0.85733882	0.793832241
Present Value	-$29,000.00	$1,611.11	$1,491.77	$12,479.04	-$13,418.08

NPV of the equipment purchase using a five-year life with straight-line depreciation to zero salvage =					-$13,418.08
Working
Depreciation per year using straight line method = $29000/5 years = $5800
Depreciation tax shield per year = Depreciation per year x Tax rate = $5800 x 30% = $1740

Calculation of after tax sale value of delivery truck
Sale value	$15,000.00
Less : Book value after 3 years	$11,600.00
Gain on sale	$3,400.00
Tax @ 30% on Gain	$1,020.00
After tax sale value [Sale value - tax]	$13,980.00

Answer b
Calculation of NPV of the equipment purchase using a five-year life and MACRS depreciation
Year	0	1	2	3	NPV
Purchase cost of new delivery truck	-$29,000.00
Depreciation tax shield		$1,740.00	$2,784.00	$1,670.40
After tax sale value of delivery truck				$13,005.60
Net Cash flow	-$29,000.00	$1,740.00	$2,784.00	$14,676.00
x Discount factor @ 8%	1	0.925925926	0.85733882	0.793832241
Present Value	-$29,000.00	$1,611.11	$2,386.83	$11,650.28	-$13,351.78

NPV of the equipment purchase using a five-year life and MACRS depreciation					-$13,351.78

Working
Calculation of depreciation tax shield
Year	Cost of new delivery truck	5 Year Class MACRS rates	Depreciation	Depreciation tax shield @ 30%
1	$29,000.00	20%	$5,800.00	$1,740.00
2	$29,000.00	32%	$9,280.00	$2,784.00
3	$29,000.00	19.20%	$5,568.00	$1,670.40

Calculation of after tax sale value of delivery truck
Sale value	$15,000.00
Less : Book value after 3 years	$8,352.00
Gain on sale	$6,648.00
Tax @ 30% on Gain	$1,994.40
After tax sale value [Sale value - tax]	$13,005.60

Answer c
Brock should prefer MACRS depreciation method as it gives lower net present value of cash flows.

jeff jeffy answered 1 year ago

Brock Florist Company bought a new delivery truck for $29,000. It was classified as a light-duty...

Brock Florist Company bought a new delivery truck for $29,000. It was classified as a light-duty truck. The company sold its delivery truck after three years of service. If a five-year life and MACRS, LOADING... , was used for the depreciation schedule, what is the after-tax cash flow from the sale of the truck (use a 40% taxrate) if a. the sales price was $16,000? b. the sales price was $10,000? c. the sales price was $1,000? Year 3-Year 5-Year ...

Brock Florist Company buys a new delivery truck for $30,000. It is classified as a light-duty...

Brock Florist Company buys a new delivery truck for $30,000. It is classified as a light-duty truck. the tax rate is 0.2 a. Calculate the depreciation schedule using a five-year life and MACRS depreciation. b. Calculate the remaining book value at the end of year 4 and the termination value (aka. cost recovery or after tax salvage value) for the delivery truck if the truck can be sold at the end of year 4 for$4,000. a. Year 1: Year 2:...

Brock Florist Company buys a new delivery truck for $28,000. It is classified as a light-duty...

Brock Florist Company buys a new delivery truck for $28,000. It is classified as a light-duty truck. the tax rate is 0.25 a. Calculate the depreciation schedule using a five-year life and MACRS depreciation. b. Calculate the remaining book value at the end of year 4 and the termination value (aka. cost recovery or after tax salvage value) for the delivery truck if the truck can be sold at the end of year 4 for$4 comma 0004,000. a. Calculate the...

Big Dog Florists (BDF) just purchased a new delivery truck for $29,000, a light truck. The...

Big Dog Florists (BDF) just purchased a new delivery truck for $29,000, a light truck. The book value at the end of the year 4 is $5,011.20 a. Big Dog Florists (BDF) sold its delivery truck after three years (Prob. 1). Using a 30% tax rate, what is the after-tax salvage value for the truck if BDF sells the truck for $15,000? b. Big Dog Florists (BDF) sold its delivery truck after three years (Prob. 1). Using a 30% tax...

Linton Company purchased a delivery truck for $29,000 on January 1, 2017. The truck has an...

Linton Company purchased a delivery truck for $29,000 on January 1, 2017. The truck has an expected salvage value of $2,100, and is expected to be driven 106,000 miles over its estimated useful life of 10 years. Actual miles driven were 15,300 in 2017 and 13,400 in 2018. Correct answer. Your answer is correct. Calculate depreciation expense per mile under units-of-activity method. (Round answer to 2 decimal places, e.g. 0.52.) Depreciation expense $Entry field with correct answer .25 per mile...

Your team asks VTEPS, Inc. to purchase a light duty delivery truck for $15,000. It is...

Your team asks VTEPS, Inc. to purchase a light duty delivery truck for $15,000. It is anticipated that the purchase of the truck will increase revenue by $10,000 annually, but have operating expenses of $3,000 per year. If your teams plans to sell the truck after two years, what is the minimum that your team can sell the truck for (i.e., MV) after 2 years in order for this to be profitable for VTEPS, Inc.?And what is the maximum that...

At Year 0, Vermont wood manufactures Inc. purchased a light duty delivery truck for $32,000 that...

At Year 0, Vermont wood manufactures Inc. purchased a light duty delivery truck for $32,000 that has a 7-year service life. The truck was place in service from Year 1. At the end of Year 7, it will be sold at a salvage value of $3000. The light duty delivery truck has been depreciated according to a 7 year MACRS property class. Calculate the annual depreciation allowances over 7 years. (8 points) Calculate the annual book values over 7 years....

Exercise 9-7 Linton Company purchased a delivery truck for $29,000 on January 1, 2017. The truck...

Exercise 9-7 Linton Company purchased a delivery truck for $29,000 on January 1, 2017. The truck has an expected salvage value of $1,100, and is expected to be driven 109,000 miles over its estimated useful life of 5 years. Actual miles driven were 12,200 in 2017 and 10,000 in 2018. Calculate depreciation expense per mile under units-of-activity method. (Round answer to 2 decimal places, e.g. 0.52.) Depreciation expense $___________ per mile Compute depreciation expense for 2017 and 2018 using (1)...

Clifford Delivery Company purchased a new delivery truck for $72,000 on April 1, 2019. The truck...

Clifford Delivery Company purchased a new delivery truck for $72,000 on April 1, 2019. The truck is expected to have a service life of 5 years or 90,000 miles and a residual value of $3,000. The truck was driven 8,000 miles in 2019 and 20,000 miles in 2020. Clifford computes depreciation expenses to the nearest whole month. Required: Compute depreciation expense for 2019 and 2020 using the following methods: (Round your answers to the nearest dollar.) Straight-line method 2019 $...

Storm Delivery Company purchased a new delivery truck for $53,400 on April 1, 2016. The truck...

Storm Delivery Company purchased a new delivery truck for $53,400 on April 1, 2016. The truck is expected to have a service life of 5 years or 150,000 miles and a residual value of $4,320. The truck was driven 8,200 miles in 2016 and 11,800 miles in 2017. Storm computes depreciation to the nearest whole month. Required: Compute depreciation expense for 2016 and 2017 using the For interim computations, carry amounts out to two decimal places. Round your final answers...

Question