4. ABC Construction must replace a number of its concrete mixer trucks with new

Question

4. ABC Construction must replace a number of its concrete mixer trucks with new trucks. It has received two bids and has evaluated closely the performance characteristics of the various trucks. The truck A, which costs $74,000, is top-of-the-line equipment. The truck has a life of eight years, assuming that the engine is rebuilt in the fifth year. Maintenance costs of $2,000 a year are expected in the first four years, followed by total maintenance and rebuilding costs of $13,000 in the fifth year. During the last three years, maintenance costs are expected to be $4,000 a year. At the end of eight years the truck will have an estimated scrap value of $9,000.
The trucks B cost $59,000 a truck. Maintenance costs for the truck will be higher. In the first year they are expected to be $3,000, and this amount is expected to increase by $1,500 a year through the eighth year. In the fourth year the engine will need to be rebuilt, and this will cost the company $15,000 in addition to maintenance costs in that year. At the end of eight years the truck will have an estimated scrap value of $5,000.
a) Using MACRS (5-year property), estimate the after-tax cash flows related to the trucks? (Use Tax rate of 35%)
b) If ABC Construction

Explanation / Answer

AAA Truck:

I = $74000

Y1 = $2000 * 0.926 = $1852

Y2 = $2000 * 0.857 = $1714

Y3 = $2000 * 0.794 = $1588

Y4 = $2000 * 0.735 = $1470

Y5 = $13000 * 0.681 = $8853

Y6 = $4000 * 0.630 = $2520

Y7 = $4000 * 0.583 = $2332

Y8 = $4000 * 0.540 = $2160

sv = -$9000 * 0.540 = -$4860

NPV = $91629

BBB Truck:

I = $59000

Y1 = $3000 * 0.926 = $2778

Y2 = $(3000 + 1500) * 0.857 = $3856.5

Y3 = $(4500 + 1500)* 0.794 = $4764

Y4 = $(6000 + 1500 + 15000) * 0.735 = $16537.5

Y5 = $(7500 + 1500) * 0.681 = $6129

Y6 = $(9000 + 1500) * 0.630 = $6615

Y7 = $(10500 + 1500) * 0.583 = $6996

Y8 = $(12000 + 1500)* 0.540 = $7290

sv = -$5000 * 0.540 = -$2700

NPV = $111266

b) If ABC Construction’s opportunity cost of funds is 10%, which truck should it accept?

accept---- AAA Truck:

c) If its opportunity cost were 15%,

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