Question

Madrano's Wholesale Fruit Company located in? McAllen, Texas is considering the purchase of a new fleet of tractors to be used in the delivery of fruits and vegetables grown in the Rio Grande Valley of Texas. If it goes through with the? purchase, it will spend $400,000 on eight rigs. The new trucks will be kept for 5 years, during which time they will be depreciated toward a $40,000 salvage value using? straight-line depreciation. The rigs are expected to have a market value in 5 years equal to their salvage value. The new tractors will be used to replace the? company's older fleet of eight trucks which are fully depreciated but can be sold for an estimated $20,000 (because the tractors have a current book value of? zero, the selling price is fully taxable at the? firm's 30 percent tax? rate). The existing tractor fleet is expected to be useable for 5 more years after which time they will have no salvage value. The existing fleet of tractors uses $200,000 per year in diesel? fuel, whereas the? new, more efficient fleet will use only $150,000. \In? addition, the new fleet will be covered under? warranty, so the maintenance costs per year are expected to be only $12,000 compared to $35,000 for the existing fleet.

a)The differential operating cash flow savings per year during years 1 through 4 for the new fleet are?

b)What are the differential operating cash flow savings per year during years 1 through 5 for the new? fleet?

C. What is the initial cash outlay required to replace the existing fleet with the newer? tractors?

D) What does the timeline for the replacement project cash flows for years 0 through 5 look? like?

E) If Madrano requires a discount rate of 15 percent for new? investments, should the fleet be? replaced?

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Answer 1