Question

8. Crazy Cliff’s Car Coral (CCCC) is considering buying a company van for $50,000. CCCC expects the van to last 5 years and be disposed of at the end of 5 years for $5,000. CCCC will fully depreciate the van over 5 years using straight-line depreciation. CCCC expects the van to increase sales by $30,000 per year over the life of the van. CCCC also expects maintenance costs to be $4,000 per year. CCCC’s tax rate is 25% and its cost of capital is 10%. What are CCCC’s net income and cashflow in each year? What is the NPV of the van?

Answer 1

Solution :

CCC'S Net Income each Year from Year 1 to Year 4 = $ 12,000

CCC'S Net Income each Year for Year 4 = $ 12,000 + $ 3,750 = $ 15,750

CCC'S Cash outflow Year 0 = $ 50,000

CCC'S Cash Inflow Year 1 to Year 4 = $ 22,000

CCC'S Cash Inflow Year 5 = $ 22,000 + $ 3,750 = $ 25,750

The NPV of the Van = $ 35,725.76

= $ 35,726 ( when rounded off to the nearest whole number )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.