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 $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight -line method over a useful of 8 years. The old van could be sold today for $7000. The new van has an invoice price of $80,000 and it will cost $6,000 to modify the van to carry the company's products. Cost savimgs from use of the new van are expected to be $28,000 per year for 5 years at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight line method over its five year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000at the inception of the project but this amount will be recaptured at the end of year five. What is the new van's terminal cash flow?

Explanation / Answer

1)the initial outlay required to fund this replacement project ?

81,200

initial outlay =machine Cost + Modifying new Machine Cost + Incremental Working Capital - Post Salvage Value of Old Machine

= 80,000+6000+5000 - (7000 +(40,000/8*3 -7000)*35%)

=81,200

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