Question

You have an opportunity to purchase a delivery van that will last 3 years and cost 28,000 dollars. You can trade in the van at the end of the 3rd year and receive the residual value of 4000 dollars. The van will allow you to make home deliveries of food for your restaurant. The van will allow you to increase net sales (sales minus variable costs) by 15,000 in the first year. In the second year the net sales will increase by an additional 5% (hint: 15,000 increased by 5%). In the third year, net sales will increase by another 5% . Calculate the NPV using an interest rate of 8%. Assume the company tax rate is 25%.

4a) Determine the NPV ignoring depreciation and taxes.

4b) Calculate the tax benefit from depreciation

4c) Now do the NPV model including the tax benefit from depreciation in your model.

Answer 1

NPV Calculation