Titan construction is considering two alternate expansions A fleet of trucks Ini

Question

Titan construction is considering two alternate expansions A fleet of trucks Initial Cost 1,000,000 Before Taxes Net Revenue Increase 400,000 / yr. Before Taxes Salvage will occur in Year 8. An upgrade to the fencing and landscaping of their corporate offices Initial Cost 800,000 Before Taxes Effective Revenue Increase 200,000/yr. Before Taxes Salvage Value Negligible. I = 3% Income Tax Rate = 40% Using Present Worth of After Tax Cash Flow over a period of six years determine taxes, after tax cash flow and Best Alternative. Depreciation will be calculated using MACRS.

Explanation / Answer

Trucks Depreciation Schedule # Year Basis % Depreciation Accumulated Ending M Expense Depreciation Book Value 1 2014 $1,000,000 14.29% $142,857 $142,857 $857,143 DB 2 2015 $1,000,000 24.49% $244,898 $387,755 $612,245 DB 3 2016 $1,000,000 17.49% $174,927 $562,682 $437,318 DB 4 2017 $1,000,000 12.50% $124,948 $687,630 $312,370 DB 5 2018 $1,000,000 8.93% $89,249 $776,879 $223,121 SL 6 2019 $1,000,000 8.93% $89,249 $866,127 $133,873 SL 7 2020 $1,000,000 8.93% $89,249 $955,376 $44,624 SL 8 2021 $1,000,000 4.46% $44,624 $1,000,000 $0 SL Trucks Depreciation Schedule # Year Basis % Depreciation Accumulated Ending M Expense Depreciation Book Value 1 2014 $800,000 14.29% $114,286 $114,286 $685,714 DB 2 2015 $800,000 24.49% $195,918 $310,204 $489,796 DB 3 2016 $800,000 17.49% $139,942 $450,146 $349,854 DB 4 2017 $800,000 12.50% $99,958 $550,104 $249,896 DB 5 2018 $800,000 8.93% $71,399 $621,503 $178,497 SL 6 2019 $800,000 8.93% $71,399 $692,902 $107,098 SL 7 2020 $800,000 8.93% $71,399 $764,301 $35,699 SL 8 2021 $800,000 4.46% $35,699 $800,000 $0 SL A Fleet of Trucks Year 0 1 2 3 4 5 6 7 8 Cash Flows -1000000 400000 400000 400000 400000 400000 400000 400000 400000 Less: Depreciation $142,857 $244,898 $174,927 $124,948 $89,249 $89,249 $89,249 $44,624 Cash Flows Before taxes $257,143 $155,102 $225,073 $275,052 $310,751 $310,751 $310,751 $355,376 Taxes @0.40 $102,857.20 $62,040.80 $90,029.20 $110,020.80 $124,300.40 $124,300.40 $124,300.40 $142,150.40 Cash Flows After Taxes $154,285.80 $93,061.20 $135,043.80 $165,031.20 $186,450.60 $186,450.60 $186,450.60 $213,225.60 Add: Depreciation $142,857 $244,898 $174,927 $124,948 $89,249 $89,249 $89,249 $44,624 Cash Flows -1000000 $297,142.80 $337,959.20 $309,970.80 $289,979.20 $275,699.60 $275,699.60 $275,699.60 $257,849.60 Discount @0.03 1 0.970873786 0.942595909 0.915141659 0.888487048 0.862608784 0.837484257 0.813091511 0.789409234 Present value of cash Flows -1000000 288488.1553 318558.9594 283667.1923 257642.7634 237820.8968 230894.0746 224169.0044 203548.8553 Net Present Value 1044789.901 Upgrade to fencing and Landscaping A Fleet of Trucks Year 0 1 2 3 4 5 6 7 8 Cash Flows -800000 200000 200000 200000 200000 200000 200000 200000 200000 Less: Depreciation $114,286 $195,918 $139,942 $99,958 $71,399 $71,399 $71,399 $35,699 Cash Flows Before taxes $85,714 $4,082 $60,058 $100,042 $128,601 $128,601 $128,601 $164,301 Taxes @0.40 $34,285.60 $1,632.80 $24,023.20 $40,016.80 $51,440.40 $51,440.40 $51,440.40 $65,720.40 Cash Flows After Taxes $51,428.40 $2,449.20 $36,034.80 $60,025.20 $77,160.60 $77,160.60 $77,160.60 $98,580.60 Add: Depreciation $114,286 $195,918 $139,942 $99,958 $71,399 $71,399 $71,399 $35,699 Cash Flows -800000 $165,714.40 $198,367.20 $175,976.80 $159,983.20 $148,559.60 $148,559.60 $148,559.60 $134,279.60 Discount @0.03 1 0.970873786 0.942595909 0.915141659 0.888487048 0.862608784 0.837484257 0.813091511 0.789409234 Present value of cash Flows -800000 $160,887.77 186980.1112 161043.7008 142143.0011 128148.816 124416.3262 120792.5497 106001.5562 Net Present Value 330413.8281 Therefore, the afternative of Fleet of trucks are selscted as the NPV is higher.

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