Question

Bob Heavy Tools is considering the acquisition of a light truck, in order to expand the business to other geographical areas. If he can expand to other areas, additional business will represents an increase in Earnings before depreciation and taxes of $60,000 annually during the first 3 years and $25,000 annually in the last 3 years. Bob’s cost of capital is 12% and is in the 32% marginal tax rate. If the light truck cost is $160,000, What is the net present value?

Answer 1

Year	0	1	2	3	4	5	6
1.Cost of truck	-160000
Operating Cash flows
2.EBDT		60000	60000	60000	25000	25000	25000
3.Depn.(160000/6)		-26667	-26667	-26667	-26667	-26667	-26667
4.EBT(2+3)		33333	33333	33333	-1667	-1667	-1667
5.Tax at 32%(4*32%)		-10666.67	-10666.67	-10666.67	533.33	533.33	533.33
6.EAT/NOPAT(4+5)		22667	22667	22667	-1133	-1133	-1133
7.Add Back: depn.(row 3)		26667	26667	26667	26667	26667	26667
8.Operating Cash flows(6+7)		49333	49333	49333	25533	25533	25533
9.Total FCFs(1+8)	-160000	49333.33	49333.33	49333.33	25533.33	25533.33	25533.33
10.PV F at12%(1/1.12^ yr.n)	1	0.89286	0.79719	0.71178	0.63552	0.56743	0.50663
11.PV at 12% (9*10)	-160000	44047.62	39328.23	35114.49	16226.89	14488.3	12935.98
12.NPV of the truck purchase(sum of row 11)	2141.52	(answer)