Question

"A local delivery company has purchased a delivery truck for $15,000. The truck will be depreciated under MACRS as a five-year property. The trucks market value (salvage value) is expected to decrease by $2,900 per year. It is expected that the purchase of the truck will increase its revenue by $20,000 annually. The O&M costs are expected to be $2,000 per year. The firm is in the 40% tax bracket, and its MARR is 12.7%. If the company plans to keep the truck only two years, what is the net present worth?"

Answer 1

If the company plans on keeping the truck for 2 years, then the salvage value will be 15000 - (2*2900) = $9,200

And assuming the MACRS Depreciation is Half Yearly Convention the annual depreciation for the first two years will be $3,000 and $4,800 and the corresponding tax savings.

There will also be O&M Costs and their tax savings.

Based on the WDV of the asset, there will also be capital gain or loss and the tax on it.

Finally all of the cash flows should be multiplied with the PV Factor of MARR 12.7%.

Good luck