Q1. 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 $2,500 per year. It is expected that the purchase of the truck will increase revenue by $10,000 annually. The operations and maintenance cost are expected to be $3,000 per year. The firm is in a 40% tax bracket and its MARR is 15%. The company plans to keep the truck for only two years. The Income statement is shown below and attached.
a. Prepare a cash flow statement for this proposal.
b. Determine the equivalent present worth and the internal rate of return.
c. Should the project be approved?
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Purchase Cost
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($15,000)
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year 1
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year 2
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Depreciation MACRS
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5
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20%
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32%
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Depreciation $
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$3,000
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$2,400
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Book Value
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$12,000
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$9,600
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Salvage decrease
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$2,500
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annually
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Salvage Value
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$12,500
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$10,000
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Gain
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$400
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Revenue Increase
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$10,000
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annually
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O & M costs
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($3,000)
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annually
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Taxes
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40%
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MARR
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15%
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Time span
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2
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years
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Income Statement
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0
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1
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2
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Revenue
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$10,000
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$10,000
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Direct Costs
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Labor
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Material
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Overhead
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Cost of Goods Sold (COGS)
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($3,000)
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($3,000)
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Gross Margin
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$7,000
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$7,000
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Depreciation
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($3,000)
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($2,400)
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Earnings Before Interest and Taxes (EBIT)
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$11,000
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$11,600
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Income Tax
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($4,400)
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($4,640)
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Net Income
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$6,600
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$6,960
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