Question

Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $4,000 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $39,000 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 $4,700 each. If your cost of capital is 8 percent and your firm faces a 35 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.) Year FCF S -182,000 References eBook & Resources Worksheet Difficulty: 3 Advanced Check my work

Answer 1

Solution :-

Cash Inflow at Year 0 due to sale to old machines ( after tax ) = $4,000 * 5 * ( 1 - 0.35 ) = $ 13,000

Cash Outflow at Year 0 due to Purchase of New Machines = $ 39,000 * 5 = $ 195,000

Net Cash Outflow at Year 0 = $195000 - $ 13000 = $182,000

Year 5 Salvage Value = ( Initial Cost - Total Dep Exps ) = ( 195000 - 183768 ) = 11,232

А B C D E F G H 1 Solution - 3 Year 0 1 2 3 4 5 5 Before tax Cost Savings 6 Less :- Dep Exps 7 Before Tax After Dep Cost Savings 8 Less :- Tax Savings / Exps 9 After tax benefits 10 Add :- Dep Exps (As Non Cash) 11 Salvage Value 12 Net Cashflows 13 14 23,500.00 23,500.00 39,000.00 62,400.00 (15,500.00) (38,900.00) (5,425.00) (13,615.00) (10,075.00) (25,285.00) 39,000.00 62,400.00 23,500.00 37,440.00 (13,940.00) (4,879.00) (9,061.00) 37,440.00 23,500.00 22,464.00 1,036.00 362.60 673.40 22,464.00 23,500.00 22,464.00 1,036.00 362.60 673.40 22,464.00 11,232.00 34,369.40 (182,000.00) 28,925.00 37,115.00 28,379.00 23,137.40 15 3 16 Dep Schedule 17 18 Year 19 Machine Cost 20 Dep Rate 21 22 Depreciation 195,000.00 0.20 195,000.00 0.32 195,000.00 0.19 195,000.00 0.1152 195,000.00 0.1152 39,000.00 62,400.00 37,440.00 22,464.00 22,464.00 23

A B C D E F G H 1 Solution - 3 Year 0 1 2 3 4 5 4 5 Before tax Cost Savings 6 Less :- Dep Exps | 7 Before Tax After Dep Cost Savings 8 Less :- Tax Savings / Exps 9 After tax benefits 10 Add :- Dep Exps (As Non Cash ) 11 Salvage Value 12 Net Cashflows =4700*5 =C22 =D5-D6 =D7*35% =D7-D8 =C22 =4700*5 =D22 =E5-E6 =E7*35% =E7-E8 =D22 =4700*5 =E22 =F5-F6 =F7*35% =F7-F8 =E22 =4700*5 =F22 =G5-G6 =G7*35% =G7-G8 =F22 =4700*5 =G22 =H5-H6 =H7*35% =H7-H8 =G22 11232 =H9+H10+H11 -182000 =D10+D9 =E10+E9 =F10+F9 =G10+G9 15 16 Dep Schedule 17 4 195000 18 Year 19 Machine Cost 20 Dep Rate 21 22 Depreciation 95000 0.32 195000 0.192 1 95000 0.1152 195000 0.1152 0.2 1-C19*C20 =D19*D20 =E19*E20 =F19*F20 =G19*G20

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