Question

"A local delivery company has purchased a delivery truck for $11,000. The truck will be depreciated under MACRS as a five-year property. The trucks market value (salvage value) is expected to decrease by $2,900 per year. It is expected that the purchase of the truck will increase its revenue by $15,000 annually. The O&M costs are expected to be $2,300 per year. The firm is in the 40% tax bracket, and its MARR is 12.1%. If the company plans to keep the truck only two years, what is the net present worth?"

Answer 1

Tax rate		40%
	Year-0	Year-1	Year-2
Increased revenue		15,000	15,000
O & M Cost		2,300	2,300
Less: Depreciation as per table given below		2,200	3,520
Profit before tax		10,500	9,180
Tax		4,200	3,672
Profit After Tax		6,300	5,508
Add Depreciation		2,200	3,520
Cash Profit After tax		8,500	9,028
Cost of macine			11,000
Depreciation			5,720
WDV			5,280
Sale price (11000-2900*2)			5,200
Profit/(Loss)			(80)
Tax			(32)
Sale price after tax			5,232
Depreciation		Year-1	Year-2				Total
Cost		11,000	11,000
Dep Rate		20.00%	32.00%
Deprecaition		2,200	3,520				5,720
Calculation of NPV
						12.10%
Year		Captial		Operating cash	Annual Cash flow	PV factor	Present values
0		(11,000)			(11,000)	1.000	(11,000)
1				8,500	8,500	0.892	7,583
2		5,232		9,028	14,260	0.796	11,348
					Net Present Value		7,930