Question

Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,200 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $31,000 each in the configuration you want them, and can be depreciated using MACRS over a 5-year life. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $3,900 each. If your cost of capital is 8 percent and your firm faces a 34 percent tax rate, what will the cash flows for this project be?

Answer 1

To determine the cash flows for this project, consider the initial investment, annual cash savings, and salvage value. The initial investment is the cost of the new vans minus the proceeds from selling the old vans. The annual cash savings are the before-tax savings due to acquiring the new vans. The salvage value is the estimated value of the new vans at the end of their useful life.

Step-by-step explanation:

To determine the cash flows for this project, we need to consider the initial investment, annual cash savings, and salvage value. The initial investment is the cost of the new vans minus the proceeds from selling the old vans. The annual cash savings are the before-tax savings due to acquiring the new vans. The salvage value is the estimated value of the new vans at the end of their useful life.

The initial investment is calculated as follows:

Initial Investment = Cost of new vans - Proceeds from selling old vans

= (Number of new vans * Cost per van) - (Number of old vans * Proceeds per van)

The annual cash flow is calculated as:

Annual Cash Flow = Before-tax cash savings - Tax savings due to depreciation

The tax savings due to depreciation is calculated by multiplying the depreciation expense by the tax rate.

The salvage value is the estimated value of the new vans at the end of their useful life, which will be used to calculate the after-tax salvage value.

The after-tax salvage value is calculated by multiplying the salvage value by (1 - tax rate).

The cash flows for this project can be calculated using the formulas above and the given information.

Answer 2

initial cash outlay (year 0) = -$144,440

cash flow year 1 = $23,410

cash flow year 2 = $29,734

cash flow year 3 = $22,988.40

cash flow year 4 = $18,941.04

cash flow year 5 = $18,941.04

cash flow year 6 = $15,905.52

Step-by-step explanation:

initial cash outlay (year 0) = (-$31,000 x 5) + ($3,200 x 5 x 0.66) = -$155,000 + $10,560 = -$144,440

cash flow year 1 = {[($3,900 x 5) - ($155,000 x 20%)] x (1 - 34%)} + ($155,000 x 20%) = $23,410

cash flow year 2 = {[($3,900 x 5) - ($155,000 x 32%)] x (1 - 34%)} + ($155,000 x 32%) = $29,734

cash flow year 3 = {[($3,900 x 5) - ($155,000 x 19.20%)] x (1 - 34%)} + ($155,000 x 19.20%) = $22,988.40

cash flow year 4 = {[($3,900 x 5) - ($155,000 x 11.52%)] x (1 - 34%)} + ($155,000 x 11.52%) = $18,941.04

cash flow year 5 = {[($3,900 x 5) - ($155,000 x 11.52%)] x (1 - 34%)} + ($155,000 x 11.52%) = $18,941.04

cash flow year 6 = {[($3,900 x 5) - ($155,000 x 5.76%)] x (1 - 34%)} + ($155,000 x 5.76%) = $15,905.52