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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Question 9-A
Q8a. (buy option). The Jacobs company needs to acquire a new lift truck for transporting its final product to the warehouse.
One alternative is to purchase the truck for $45,000. Maintenance of the truck will be an annual cost of $1,200. The truck falls into the 5-year MACRS classification and it has a salvage value of $10,000, which is the expected market value after 4 years, at which time Jacob plans to replace the truck, irrespective of whether it is purchased or leased.
Alternatively, Jacob could lease the truck under a four-year contract for a lease payment of $15,000 per year. Each annual lease payment must be made at the beginning of the year. This is an operating lease, so the truck would be maintained by the lessor (the leasing company).
The Jacobs company has a marginal tax rate of 40% and a MARR of 15%.
a, Prepare an Income for the "Buy" cost-only option.
b. Prepare Cash flow statement for the "Buy" option.
c. What is the present worth of the cost of purchasing the truck?
Question 9-B Lease
Q8b. (lease option). The Jacobs company needs to acquire a new lift truck for transporting its final product to the warehouse.
One alternative is to purchase the truck for $45,000. Maintanence of the truck will be an annual cost of $1,200. The truck falls into the 5-year MACRS classification and it has a salvage value of $10,000, which is the expected market value after 4 years, at which time Jacob plans to replace the truck, irrespective of whether it is purchased or leased.
Alternatively, Jacob could lease the truck under a four-year contract for a lease payment of $15,000 per year. Each annual lease payment must be made at the beginning of the year. This is an operating lease, so the truck would be maintained by the lessor (the leasing company).
The Jacobs company has a marginal tax rate of 40% and a MARR of 15%.
a, Prepare an Income for the "Lease" cost-only option.
b. Prepare Cash flow statement for the "Lease" option.
c. What is the present worth of the cost of leasing?
Question 9-9
Q9. An industrial engineer proposed the purchase of a RFID Fixed Asset Tracking System for the company's warehouse and weave rooms. The engineer though that the system would provide a better system of locating cartons in the warehouse by recording the locations of the cartons and storing the data in the computer. The annual operating and maintenance (O&M) costs and expected annual savings are as follows:
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Cost of equipment and installation
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$85,500
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Project life (years)
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6
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Estimated salvage value
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$5,000
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in year 6
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Investment in working capital
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$15,000
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(fully recoverable at end of project)
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Expected savings on labor/material
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$65,800
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annual
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Expected Expenses
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$9,150
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annual
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Depreciation MACRS years
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5
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Marginal Tax rate
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35%
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a Determine the net after-tax cash flows over the project life.
b Compute the IRR for this investment.
c At MARR = 18%, is the project acceptable?
Question 9-9
Q10 Consider a five-year MACRS asset purchase for $80,000. The applicable year end salvage values are estimated as $20,000 in year 3, $5,000 in year 5, $3,000 in year 6, and $2,000 in year 8. Fill in the table below by computing the depreciation, book value, gain/loss amounts and taxes to be paid/received (indicate which) on this gain or loss for the alternative situations of the asset being sold for the salvage value in year 3, 5, 6 and 8. The MACRS from Table 9.3 page 448 are shown below. Use 30% for the capital gains tax rate.
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Year
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1
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2
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3
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4
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5
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6
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7
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8
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MACRS rate
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20%
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32%
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19.20%
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11.52%
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11.52%
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5.76%
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0.00%
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0.00%
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Depreciation
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Sold in year
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Year
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1
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2
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3
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4
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5
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6
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7
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8
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3
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Salvage Value
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Book Value
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Taxable Income
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Taxes
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5
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Salvage Value
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Book Value
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Taxable Income
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Taxes
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6
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Salvage Value
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Book Value
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Taxable Income
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Taxes
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8
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Salvage Value
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Book Value
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Taxable Income
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Taxes
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Question 9-11
Q11. You are earning 5.2 percent on a certificate of deposit. Inflation is running 3.5 percent. What is the real rate of return on your investment?
Question 9-12
Q12. Search for a definition of one of the following economic indexes (or other one) and describe its purpose and how it is calculated: CPI, PPI, HEPI CPI-U.
Question 9-13
Q13. Is the corporate income tax system unfair? Why or why not? Should it be changed? Is a flat tax the answer? Is no corporate tax, like LLCs, the answer (where owners pay personal income tax on the distribution of earnings). This is not a question on the merits of taxes, government, the constitution, or related issues. The goal is to better understand corporate taxation.