Question

"A local delivery company has purchased a delivery truck for $12,000. The truck will be depreciated under MACRS as a five-year property. The trucks market value (salvage value) is expected to decrease by $2,800 per year. It is expected that the purchase of the truck will increase its revenue by $13,000 annually. The O&M costs are expected to be $4,100 per year. The firm is in the 40% tax bracket, and its MARR is 15.3%. If the company plans to keep the truck only two years, what is the net present worth?"

Answer 1

Depreciation rates are 20% and 32%. Half year convention is applicable so total depreciation is 2400 + 1920 = 4320. Book value is 12000 - 4320 = 7680 at the time of sale of the truck and the salvage value is 12000 - 2800*2 = 6400. Hence capital gain tax is = -512

Net Present worth = -12000 + 6300(1 + 15.3%)^-1 + 11996*(1 + 15.3%)^-2 = 2488

Year		0	1	2
Income statement
Revenues			13000	13000
Expenses
Overhead			4100	4100
Depreciation			2400	1920
Taxable income			6500	6980
Income tax			2600	2792
Net income			3900	4188
Cash flow statement
Operating activities
Net income			3900	4188
Depreciation			2400	1920
Investment activities
Investment		-12000
Salvage				6400
Gains tax				-512
Net cash flow		-12000	6300	11996