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

	0	1	2
Annual increase in revenue		13000	13000
Annual O&M Costs		4100	4100
Depreciation - MACRS -		2400	3840
Incremental NOI		6500	5060
Tax at 40%		2600	2024
Net operating profit after tax		3900	3036
Add: Depreciation		2400	3840
Operating cash flow		6300	6876
Capital spending	12000		-6144
FCF	-12000	6300	13020
PVIF at 15.3%	1	0.86730	0.75221
PV at 15.3%	-12000	5464	9794
NPW	3258
NET AFTER TAX SALVAGE VALUE AT EOY 2:
Salvage value = 12000-2800*2 =	6400
Book Value = 12000-2400-3840 =	5760
Gain	640
Tax at 40% on gain	256
Net after tax salvage value	6144