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 $3,800 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $37,000 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 about $4,500 each. If your cost of capital is 12 percent and your firm faces a 35 percent tax rate, what will the cash flows for this project be?

Answer 1

Year	0	1	2	3	4	5
Sale of Old vehicles=5*3800*(1-35%)	$    12,350
New Van Costs	$ -185,000
Before tax cost savings		$    4,500	$    4,500	$    4,500	$    4,500	$    4,500
Macrs Rate		20%	32%	19.20%	11.52%	11.52%
Depreciation		$ 37,000	$ 59,200	$ 35,520	$ 21,312	$ 21,312
EBIT =Before Tax Cost Savinfgs -Depreciation		$ -32,500	$ -54,700	$ -31,020	$ -16,812	$ -16,812
Tax =EBIT *Tax Rate		$ -11,375	$ -19,145	$ -10,857	$   -5,884	$   -5,884
Net income = EBIT -Taxes		$ -21,125	$ -35,555	$ -20,163	$ -10,928	$ -10,928
Depreciation		$ 37,000	$ 59,200	$ 35,520	$ 21,312	$ 21,312
Free Cash flow	$ -172,650	$ 15,875	$ 23,645	$ 15,357	$ 10,384	$ 10,384