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:
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Custom
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Deluxe
|
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Acquisition cost
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$20,000
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$25,000
|
|
Annual operating costs
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$ 3,500
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$ 2,000
|
|
Depreciation method
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MACRS
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MACRS
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|
Expected salvage value
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$ 5,000
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$ 8,000
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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 fed- eral income 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.