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 $3,700 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $29,850 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 $4,400. If your cost of capital is 8 percent and your firm faces a 34 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.) Year 0 1 2 3 4 5 6 FCF $ $ $ $ $ $ $

Answer 1

Sale price of old vans = $3,700 per van

Hence, sale price of 5 old vans = 3,700 x 5

= $18,500

Purchase price of NV Van = $29,850 per van

Hence, total purchase price of 5 NV Vans = 29,850 x 5

= $149,250

Hence, cash outflow in year 0 = 149,250 - 18,500

= $130,750

MACRS depreciation rates = 20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%

Calculation of annual cash inflows

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Cash flows before tax	4,400	4,400	4,400	4,400	4,400	4,400
Less: Tax	-1,496	-1,496	-1,496	-1,496	-1,496	-1,496
Cash flows after tax	2,904	2,904	2,904	2,904	2,904	2,904
Add: Depreciation	29,850	47,760	28,656	17,194	17,194	8,597
Net Cash flows	32,754	50,664	31,560	20,098	20,098	11,501