Question

P12-30 (similar to) Question Help (Related to Checkpoint 12.2) (Replacement project cash flows) Madrano's Wholesale Fruit Company located in McAllen, Texas is considering the purchase of a new fleet of tractors to be used in the delivery of fruits and vegetables grown in the Rio Grande Valley of Texas. If it goes through with the purchase, it will spend $440,000 on eight rigs. The new trucks will be kept for 5 years, during which time they will be depreciated toward a $39,000 salvage value using straight-line depreciation. The rigs are expected to have a market value in 5 years equal to their salvage value. The new tractors will be used to replace the company's older fleet of eight trucks which are fully depreciated but can be sold for an estimated $19,000 (because the tractors have a current book value of zero, the selling price is fully taxable at the firm's 25 percent tax rate). The existing tractor fleet is expected to be useable for 5 more years after which time they will have no salvage value. The existing fleet of tractors uses $195,000 per year in diesel fuel, whereas the new, more efficient feet will use only $130,000 In addition, the new fleet will be covered under warranty, so the maintenance costs per year are expected to be only $16,000 compared to $37,000 for the existing fleet

Answer 1

200000 Timeline of cash flow 100000 1 2 3 4 5 6 -100000 Year f -200000 cash flow -300000 -400000 -500000 Years

1-
Year	1	2	3	4	5
differential saving in fuel cost	65000	65000	65000	65000	65000
differential saving in maintenance cost	21000	21000	21000	21000	21000
less annual depreciation =(440000-39000)/5	80200	80200	80200	80200	80200
operating differential saving	5800	5800	5800	5800	5800
tax-25%	1450	1450	1450	1450	1450
after tax savings	4350	4350	4350	4350	4350
add depreciation	80200	80200	80200	80200	80200
add salvage value					39000
differential operating cash flow	84550	84550	84550	84550	123550
2-
Initial cash outlay
cost of trucks		-440000
after tax sale proceeds of old tractors	19000*(1-.25)	14250
Initial cash outlay		-425750
Year	0	1	2	3	4	5
cash flow	-425750	84550	84550	84550	84550	123550
4-
Year	0	1	2	3	4	5
cash flow	-425750	84550	84550	84550	84550	123550
present value factor @ 125 =1/(1+r)^n r =12%	1	0.892857143	0.797193878	0.71178025	0.63551808	0.56742686
present value of cash flow = cash flow*present value factor	-425750	75491.07143	67402.74235	60181.02	53733.0535	70105.588
net present value = sum of present value of cash flow	-98836.52472
No fleet should not be replaced as NPV is negative