Your company is considering the replacement of an old delivery van with a new on

Question

Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $30000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5000.

The new van has an invoice price of $75000, and it will cost $5000 to modify the van to carry the company's products.Cost savings from the use of the new van are expected to be $22000 per year for 5 years, at which time the van will be sold for its salvage value of $15000. The new van will be depreciated using the simplified straight line method over its useful life.

The company's tax rate is 35%. Working capital is expected to increase be $3000 at the inception of the project but this amount will be recaprtured at the end of year 5.

Explanation / Answer

nvestment in the new van 75000 Modification Cost 5000 Working Capital requirement 3000 less: Proceeds from sale -5000 Incremental Cash at the beginning of the year 1 78000 Cost savings 22000 Less:Taxes on the above -7700 Net Cost savings 14300 Add: Depreciation (75,000+5,000 - 15,000) / 5 13000 Incremental Cash at the end of the year 1 27300

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