O\'Brien Salvage is considering the purchase of a new heavy duty truck. This tru

Question

O'Brien Salvage is considering the purchase of a new heavy duty truck. This truck will be picking up scrap from large industrial manufacturers throughout suburban Chicago. This is a ma until recently has been unable to enter. Use the following data and answer the Initial Investment rket that O'Brien questions that follow. Annual Revenue Annual Cash Expenses Salvage Value Useful Life 118,000 60,000 40,000 25,000 10 years Hurdle Rate 12% What is net cash inflow annually? How much in annual depreciation expense? How much is annual net income? Calcluate RO

Explanation / Answer

1. Net cash inflow annually:

Cash Inflow = Cash Revenue - Cash expenses

= 60000 - 40000 = 20000

Threfore Annual Cash Inflow = 20,000.

2. Annual depreciation Expense

Depreciation = (Initial Investment - Salvage Value) / useful Life

= (118000 - 25000) / 10 = 9,300

3. Annual Net Income

Annual Net Income = Net Cash Inflow - Non cash expenses

= 20000 - 9300

= 10,700

4. Return on Investment(ROI)

Return on Investment = Net Annual Income / Initial Investment

= 10700 / 118000 = 9.07%

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