Question:
CAPITAL INVESTMENT WITH COMPETING PROJECTS (WITH TAX EFFECTS)
Weins Postal Service (WPS) has decided to acquire a new delivery truck. The choice has been narrowed to two models. The following information has been gathered for each model:
|
|
Custom
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Deluxe
|
|
Acquisition cost
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$20,000
|
$25,000
|
|
Annual operating costs
|
$3,500
|
$2,000
|
|
Depreciation method
|
MACRS
|
MACRS
|
|
Expected salvage value
|
$5,000
|
$8,000
|
WPS's cost of capital is 14 percent. The company plans to use the truck for five years and then sell it for its salvage value. Assume the combined state and federal tax rate is 40 percent.
Required:
1. Compute the after-tax operating cash flows for each model.
2. Compute the NPV for each model, and make a recommendation.