Question

(Related to Checkpoint​ 12.2)  ​(Replacement project cash​ flows)  ​Madrano's Wholesale Fruit Company located in​ McAllen, Texas is considering the purchase of a new fleet of tractors to be used in the delivery of fruits and vegetables grown in the Rio Grande Valley of Texas. If it goes through with the​ purchase, it will spend ​$440 comma 000 on eight rigs. The new trucks will be kept for 5 ​years, during which time they will be depreciated toward a ​$39 comma 000 salvage value using​ straight-line depreciation. The rigs are expected to have a market value in 5 years equal to their salvage value. The new tractors will be used to replace the​ company's older fleet of eight trucks which are fully depreciated but can be sold for an estimated ​$15 comma 000 ​(because the tractors have a current book value of​ zero, the selling price is fully taxable at the​ firm's 29 percent tax​ rate). The existing tractor fleet is expected to be useable for 5 more years after which time they will have no salvage value. The existing fleet of tractors uses ​$210 comma 000 per year in diesel​ fuel, whereas the​ new, more efficient fleet will use only ​$140 comma 000. In​ addition, the new fleet will be covered under​ warranty, so the maintenance costs per year are expected to be only ​$15 comma 000 compared to ​$33 comma 000 for the existing fleet.

a.  What are the differential operating cash flow savings per year during years 1 through 5 for the new​ fleet?

b.  What is the initial cash outlay required to replace the existing fleet with the newer​ tractors?

c.  What does the timeline for the replacement project cash flows for years 0 through 5 look​ like? d.  If Madrano requires a discount rate of 9 percent for new​ investments, should the fleet be​ replaced?

a.  The differential operating cash flow savings per year during years 1 through 4 for the new fleet are ​$

Answer 1

2.

a.  What are the differential operating cash flow savings per year during years 1 through 5 for the new​ fleet?

Year 1 - 4 = $85738 and for Year 5 = $85738

b.  What is the initial cash outlay required to replace the existing fleet with the newer​ tractors?

Initial Outlay = -$429350

c.  What does the timeline for the replacement project cash flows for years 0 through 5 look​ like?

Provided in image

d.  If Madrano requires a discount rate of 9 percent for new​ investments, should the fleet be​ replaced?

NPV = -$70511.76. as the NPV is negative it is not recommended to invest in the fleet

In the image, Horizontal axis showing 1 - 6 represents Year 0 to Year 5

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