Mariam, the owner of a flower shop, is considering buying a new van for deliveri

Question

Mariam, the owner of a flower shop, is considering buying a new van for deliveries. She has estimated that the new van would result in a savings of 8000$ per year over the old van. The new van would cost 25000? and would have a useful life of eight years, at which time it would be sold for 2500s. Mariam uses a 20 % before-tax MARR, and the van would be depreciated by using MACRS 5 year recovery period. Calculate if Mariam should purchase the van using an after -tax present worth analysis. Mariam uses a 40% income tax rate.

Explanation / Answer

Calculation of Depreciation

Calculation of PV of Intermediate Cashflows

Calculation of Terminal Cashflow

Calculation of NPV

The buying of VAN is worth as the Net Present Worth is positive.

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Savings $        8,000 Cost of Van $     25,000 Residual Value $        2,500 Useful Life 8 Years Cost of Capital 20% Tax Rate 40% Post-Tax Cost of Capital 12%

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