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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
O & M costs
($3,000)
Taxes
40%
MARR
15%
Time span
2
years
Income Statement
0
1
Revenue
Direct Costs
Labor
Material
Overhead
Cost of Goods Sold (COGS)
Gross Margin
$7,000
Depreciation
($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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