Question

Your company is contemplating replacing its current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,800 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $37,000 each in the configuration you want them and can be depreciated using MACRS over a 5-year life. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $4,500 each. If your cost of capital is 12 percent and your firm faces a 35 percent tax rate, what will the cash flows for this project be?

Answer 1

The old vehicles are fully depreciated, hence their book value is zero, and the entire salvage value of $3800 per vehicle will be subject to tax at 35%.

After-tax cash savings = (before-tax cash savings - depreciation) * (1 - tax rate) + depreciation

Cash outflow in Year 0 = cost of new vehicles - after tax salvage value of old vehicles

A 1 2 Cash Flows 3 Cost of new vehicles 4 Salvage value of old vehicles 5 Tax on salvage value 6 After-tax salvage value 7 Before-tax cash savings 8 Depreciation 9 After-tax cash savings 10 11 Cash Flows $185,000 $19,000 $6,650 $12,350 $22,500 $37,000 $27,575 $22,500 $59,200 $35,345 $22,500 $35,520 $27,057 $22,500 $21,312 $22,084 $22,500 $21,312 $22,084 ($172,650) $27,575 $35,345 $27,057 $22,084 $22,084

в A 1 2 Cash Flows 3 Cost of new vehicles 4 Salvage value of old vehicles 5 Tax on salvage value 6 After-tax salvage value 7 Before-tax cash savings 8 Depreciation 9 After-tax cash savings 10 11 Cash Flows =37000*5 =3800*5 =B4*35% =B4-B5 -4500*5 =$B$3*20% =((C7-C8)*(1-35%))+C8 =4500*5 =$B$3*32% =((D7-D8)*(1-35%))+D8 =4500*5 =$B$3*19.2% =((E7-E8)*(1-35%))+E8 -4500*5 =$B$3*11.52% = {(F7-F8)*(1-35%))+F8 -4500*5 =$B$3*11.52% =((G7-68)*(1-35%))+G8 --B3+B6 =C9 =D9 =E9 =F9 =G9