Ganges Express, a package delivery company, operates a fleet of Volvo trucks at

Question

Ganges Express, a package delivery company, operates a fleet of Volvo trucks at one terminal where the lease of 175,000 euros per year is expiring. They had planned to set up another lease with Volvo for next three years at a cost of 200,000 euros per year in operating expenses. This is the total cost for the entire fleet. A Scania sales rep just called to offer a discounted price of 700,000 euros for Ganges to purchase a new fleet (instead of leasing). If the new fleet is purchased, then Ganges expects to sell the Scania trucks at book value at the end of three years. They use straight-line depreciation over 5 years for new vehicles. Assume the tax rate is 30% and the discount rate for Ganges Express is 10%. Ignore inflation.

What is the Payback Period for the purchase of Scania trucks?

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Explanation / Answer

Years Years Years Years purchase of the asset 0 1 2 3 cash outflow at the year beginning 700000 cash inflow 200000 200000 480000 Tax @30% 60000 60000 144000 140000 140000 336000 Add : Depreciation 140000 140000 140000 CFAT 280000 280000 476000 Discount factor @10% 0.9091 0.8264 0.7513 Present value of cash flows 254545 231405 357626 calculation of Pay back period year Cash flows Cumulative cash flows 0          (700,000)          (700,000) 1           254,545          (445,455) 2           231,405          (214,050) 3           357,626           143,576 4 payback period 2 years 0.598529412 years when positive cumulative cash flow occurs ( -( 214050 / 357626 )) Ans - 2.60 years calculation of dpreciation cost of asset 700000 scrap 0 Duration 5 years Depreciation 140000 ( 700000 - 0 ) / 5 Book value at the end of years 1 560000 2 420000 3 280000 4 140000 5 0

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