Prepare a cash flow statement , Finance Basics

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?

	Purchase Cost	($15,000)	year 1	year 2
	Depreciation MACRS	5	20%	32%
	Depreciation $		$3,000	$2,400
	Book Value		$12,000	$9,600
	Salvage decrease	$2,500	annually
	Salvage Value		$12,500	$10,000
	Gain			$400
	Revenue Increase	$10,000	annually
	O & M costs	($3,000)	annually
	Taxes	40%
	MARR	15%
	Time span	2	years

Income Statement		0	1	2
Revenue			$10,000	$10,000
Direct Costs
	Labor
	Material
	Overhead
	Cost of Goods Sold (COGS)		($3,000)	($3,000)
	Gross Margin		$7,000	$7,000
	Depreciation		($3,000)	($2,400)
Earnings Before Interest and Taxes (EBIT)			$11,000	$11,600
	Income Tax		($4,400)	($4,640)
	Net Income		$6,600	$6,960

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