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 Atter 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

Calculation of Depreciation for trucks and upgradation

Calculation of Present value of trucks; where cash flows per year = 400000 - 125000 = 375000

Calculation of Present value of Fencing and upgradation; where cash flows per year = 200000 - 133333 = 66667

Alternative 1 should be chosen as the PV of cash inflows is better.

Years Trucks Upgradation Book value Depreciation Book value Depreciation 1 1000000 125000 800000 133333 2 875000 125000 666667 133333 3 750000 125000 533333 133333 4 625000 125000 400000 133333 5 500000 125000 266667 133333 6 475000 125000 133333 133333

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