A contractor has a project that will produce revenues of $40,000 and operating c

Question

A contractor has a project that will produce revenues of $40,000 and operating costs of $2000 dollars every year. The contractor needs a truck for moving earth purposes. The project course runs for 7 years . The contractor is considering purchasing a truck or renting a truck. The Tax rate is 30% and cost of capital is 10%.

a.) If the contractor purchases the truck it is a $50,000 investment, and follows 5-year MACRS-GDS deprectiation schedule.

b.) Renting a truck is $90 per day

How many days a year does the truck have to be used in order for it to be more attractive to the contractor to purchase a truck versus renting.

Explanation / Answer

a)

tax rate = 30%

to ccalculate cash flow first taxable income will be calculated by subtracted depreciation and then add it back to after tax income

cash flow in year 1, = (40000-2000-.2*50000)*.7+.2*50000 = 29600

cash flow in year 2 = (40000-2000-.32*50000)*.7+.32*50000 = 31400

cash flow in year 3 = (40000-2000-.192*50000)*.7+.192*50000 = 29480

cash flow in year 4 = (40000-2000-.115*50000)*.7+.115*50000 = 28325

cash flow in year 5 = (40000-2000-.115*50000)*.7+.115*50000 = 28325

cash flow in year 6 = (40000-2000-.058*50000)*.7+.058*50000 = 27470

cash flow in year 7 = (40000-2000)*.7 = 26600

NPV = -50000+(29600/1.1^1)+(31400/1.1^2)+(29480/1.1^3)+(28325/1.1^4)+(28325/1.1^5)+(27470/1.1^6)+(26600/1.1^7)

NPV = $91098.32

b)

b) to calculate no of days

let no of workingdays = x

cash flow per yyear = 40000-2000-90x)*.7

since cash flow will be equal for all years, so PV can be calculated using PVIFA

NPV = (cash flow per year)*PVIFA(10,7)

91098.32 = (40000-2000-90x)*.7*4.8684

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