Your company is contemplating replacing their current fleet of delivery vehicles
ID: 2740695 • Letter: Y
Question
Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $4,500 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $44,000 each in the configuration you want them, and can be depreciated using MACRS over a 5-year life. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $5,200 each. If your cost of capital is 10 percent and your firm faces a 40 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.)
Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $4,500 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $44,000 each in the configuration you want them, and can be depreciated using MACRS over a 5-year life. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $5,200 each. If your cost of capital is 10 percent and your firm faces a 40 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.)
Explanation / Answer
After tax cash out flow (after adjusted depreciation) = (Cash flow × 1-Tax rate) + (value of 5 assets)×MACRS rate
After tax cash out flow (after adjusted depreciation) 1st year = ($5,200 × 1-0.40) + [($44,000×5)×0.20]
= $47,120
After tax cash out flow (after adjusted depreciation) 2nd year = ($5,200 × 1-0.40) + [($44,000×5)×0.32]
= $73,520
After tax cash out flow (after adjusted depreciation) 3rd year = ($5,200 × 1-0.40) + [($44,000×5)×0.192]
= $45,360
After tax cash out flow (after adjusted depreciation) 4th year = ($5,200 × 1-0.40) + [($44,000×5)×0.1152]
= $28,464
After tax cash out flow (after adjusted depreciation) 5th year = ($5,200 × 1-0.40) + [($44,000×5)×0.1152]
= $28,464
Now, let us use the above 5 year cash flows into account to calculate net cash flows as follows:
Year
Details
Cash flows
Discounting factor @ 10%
Discounted
cash flow
0
Net Cash outflow
($44,000×5)-($4,500×5)
-197500
1
$ (197,500.00)
1
Cash inflows
$ 47,120
0.909090909
$ 42,836.36
2
Cash inflows
$ 73,520
0.826446281
$ 60,760.33
3
Cash inflows
45360
0.751314801
$ 34,079.64
4
Cash inflows
28464
0.683013455
$ 19,441.29
5
Cash inflows
28464
0.620921323
$ 17,673.90
Net present value
$ (22,708.47)
Therefore, net cash flows are $22,708.47.
Note: Cash flows are considered upto 5 years only.
Year
Details
Cash flows
Discounting factor @ 10%
Discounted
cash flow
0
Net Cash outflow
($44,000×5)-($4,500×5)
-197500
1
$ (197,500.00)
1
Cash inflows
$ 47,120
0.909090909
$ 42,836.36
2
Cash inflows
$ 73,520
0.826446281
$ 60,760.33
3
Cash inflows
45360
0.751314801
$ 34,079.64
4
Cash inflows
28464
0.683013455
$ 19,441.29
5
Cash inflows
28464
0.620921323
$ 17,673.90
Net present value
$ (22,708.47)
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