Maplewood Creations is considering the purchase of a new truck to replace an old truck that has a book value of $2,500 and a market value of $800. The annual depreciation expense on the old truck was $500. The new truck, which will cost $29,000, will reduce operating costs $9,000 per year over it's 6 year economic life. The new truck has a 5-year MACRS life and an estimated salvage value at the end of 6 years of $2,000. If Maplewood has a 40 percent marginal tax rate and a cost of capital of 12 percent, what is the NPV of the new truck? Use the Depreciation schedule listed below:
(5-Year depreciation Schedule: 20%, 32%, 19%, 12%, 12%, 5%)

Question

Quizplus · Accepted Answer

Solution: NINV = $29,000 - $800 - ($2,500 - $800)(0.4) = $27,520 To determine the cash inflows: [(Savings - Book Value of new truck per year - Depreciation on old truck) * (1- tax rate)] + depreciation NCF₁ = (9,000 - 5,800 - 500)(.6) + 5,300 = $6,920 NCF₂= (9,000 - 9,280 - 500)(.6) + 8,780 = $8,312 NCF₃ = (9,000 - 5,510 - 500)(.6) + 5,010 = $6,804 NCF₄= (9,000 - 3,480 - 500)(.6) + 2,980 = $5,992 NCF₅= (9,000 - 3,480 - 500)(.6) + 2,980 = $5,992 NCF₆ = (9,000 - 1,450)(.6) + 1,450 + 2,000(0.6) = $7,180 NPV @ 12% = $973.46 using a calculator

Maplewood Creations Is Considering the Purchase of a New Truck