Question

"A local delivery company has purchased a delivery truck for $19,000. The truck will be depreciated under MACRS as a five-year property. The trucks market value (salvage value) is expected to decrease by $2,100 per year. It is expected that the purchase of the truck will increase its revenue by $11,000 annually. The O&M costs are expected to be $3,800 per year. The firm is in the 40% tax bracket, and its MARR is 15.3%. If the company plans to keep the truck only two years, what is the net present worth?"

Answer 1

Book value after 2 year of truck = 19000 - (19000*35%+19000*26%)

= 19000 - 6650 - 4940

= 7410

salvage value after 2 year = 19000 - 2100*2

= 19000 - 4200

= 14800

taxable amt./profit on sale of truck = 14800 - 7410

= 7390

Calculation of Net present worth of the truck -

	MACRS Dep. chart		35.00%	26.00%	PW
	Years	0	1	2
	Initial purcahsing cost	-19000
	revenue		11000	11000
less	O&M Costs		3800	3800
less	Depriciation		6650	4940
	Net income		550	2260
add	profit on sale of truck			7390
	Total profit		550	9650
less	Tax @ 40%		220	3860
	Profit after tax		330	5790
add	Depriciation add back		6650	12350
	Total cash flow		6980	18140
	discounting @ 15.3%	1	0.867303	0.752214
	Present value	-19000	6053.773	13645.16	698.9339

Net present worth = 698.9339

note - MACRS dep. chart convention assume first quarter. the answer can be different if MACRS dep. % put differently.

Please note all values are in $ and comment in case of any clarification required.