BNSF railroad needs to increase the fleet of tanker cars for hauling crude oil.

Question

BNSF railroad needs to increase the fleet of tanker cars for hauling crude oil. Each car has a first cost of $800,000. Each car is also expected to have annual maintenance and operating costs of $50,000. It is estimated that each year, $450,000 additional revenue can be generated per car. BNSF uses the General Depreciation System (GDS) IRS guidelines for recovery period. In the last year of the recovery period a car has an expected resale value of $150,000.

For the depreciable life of one car, determine the Annual Worth at 10% and Rate of Return for the CFBT and CFAT.

Explanation / Answer

Year

First under GDS system for cars, the depreciation recpovery priod is 5 years and percentage will be 200% decling balance and convention is half year

Year

Amount Dep % Amount Dep 1 800000 20% 160000 2 800000 32% 256000 3 800000 19.20% 153600 4 800000 11.52% 92160 5 800000 11.52% 92160 Year Cash Inflow Depreciation Net Cash Inflow Tax 30% Net Adding Dep Present Value(10%, 5 years) 0 -800000 0 -800000 0 -800000 -800000 1 -800000 1 400000 160000 240000 72000 168000 328000 0.9091 298184.80 2 400000 256000 144000 43200 100800 356800 0.8264 294859.52 3 400000 153600 246400 73920 172480 326080 0.7513 244983.90 4 400000 92160 307840 92352 215488 307648 0.683 210123.58 5 550000 92160 457840 137352 320488 412648 0.6209 256213.14 596080 177256 NPV 504364.95 Annual Cash Inflow =450000-50000=400000 Cash Inflow after 5 year =400000+150000 Assuming tax is 30% Rate of Return CFBT =sum of Net cash flow after depreciation/Initial Investment 0.7451 74.51% Rate of Return CFAT =sum of Net cash flow after tax/Initial Investment 0.22157 0.2218 22.18%

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