Question

Your company may buy a used pick-up for $20,000. During the truck's five year useful life, it is estimated the firm will save $5,000 per year after all of the costs of owning and operating the truck have been paid. The truck's salvage value is estimated to be $3,000. Assume straight line depreciation and a tax rate of 35%. Assume r of 10%.Create a model that will calculate before-tax and after-tax cash flows.

Answer 1

Please see explanation

Step-by-step explanation:

The before tax and after tax cash flow calculation can be made through below mentioned model:

0 1 2 3 4 5

Pick-up cost (20,000)

Saving to firm 5,000 5,000 5,000 5,000 5,000

Salvage value 3,000

Pre tax CF (20,000) 5,000 5,000 5,000 5,000 8,000

Tax@35% (1,750) (1,750) (1,750) (1,750) (2,800)

Tax saving on dep 1,190 1,190 1,190 1,190 1,190

((20,000-3000)/5*35%)

After tax CF ($20,000) $4,440 $4,440 $4,440 $4,440 $6,390