Your company is contemplating replacing their current fleet of delivery vehicles

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 $3,700 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $29,850 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 $4,400. If your cost of capital is 8 percent and your firm faces a 34 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.) Year 0 1 2 3 4 5 6 FCF $ $ $ $ $ $ $

Explanation / Answer

Sale price of old vans = $3,700 per van

Hence, sale price of 5 old vans = 3,700 x 5

= $18,500

Purchase price of NV Van = $29,850 per van

Hence, total purchase price of 5 NV Vans = 29,850 x 5

= $149,250

Hence, cash outflow in year 0 = 149,250 - 18,500

= $130,750

MACRS depreciation rates = 20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%

Calculation of annual cash inflows

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash flows before tax 4,400 4,400 4,400 4,400 4,400 4,400 Less: Tax -1,496 -1,496 -1,496 -1,496 -1,496 -1,496 Cash flows after tax 2,904 2,904 2,904 2,904 2,904 2,904 Add: Depreciation 29,850 47,760 28,656 17,194 17,194 8,597 Net Cash flows 32,754 50,664 31,560 20,098 20,098 11,501

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