Question

You are buying a new truck in order to grow your local moving service. The new truck costs $37,000. You will need to spend another $6,000 on hitches, ramps, and other special equipment for this use. You will use this truck for 4 years and then you plan that the salvage value will be $8,000.

The new truck should increase revenue by 40% over last year's $85,000 revenue. As a result of the truck purchase, operating expenses will increase by $11,000. The depreciation expense will increase by $2500. Your marginal tax rate is 35%.

In which year will salvage value affect the net cash flow calculations?

2

1

3

4

Answer 1

The truck which is planned to be purchased would be used for 4 years and after that the salvage value of truck would be $8,000.

For years 1 to 3 the net cash flow would remain the same as no new transaction has been undertaken and the sales revenue, operating expenses of $11,000, the increase in depreciation of $2,500 and the tax rate all would remain same upto the third year. In fourth year also the revenue, operating expenses, increase in depreciation would remain same, however in fourth year the truck would be sold at its salvage value and so the net cash flow in year 4 would differ from that of year 1 to 3.

Thus, in the 4th year salvage value would affect the net cash flow calculations.