Question

Thompson’s Tree Farm is considering the replacement of its large delivery tractor and trailor. The old truck originally cost $ 60,000 when it was purchased one year ago.It is being depreciated over a six year life to zero book value.Thompson believes that the remaining useful life of the old truck is five years after which it will have a resale value of zero.The company can sell the truck now for$ 14,000.

        The new truck will cost $90,000 and will be depreciated over a five year period to a zero book value.At the end of five years it will be sold for $20,000.The new truck will produce cash savings of $ 23,000.The company’s tax rate is 40% and uses straight line depreciation.The required rate of return for the project is 10%.

          a.Find the project’s initial outlay.

         b.Find the project’s operating and terminal cash flows from years 1through 5.

         c.Evaluate the project using NPV.                                    

Answer 1