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Question 7.O: A new municipal refuse collection vehicle can be purchased f...

A new municipal  refuse collection vehicle can be  purchased for  $84,000. Its  expected  useful  life is six years,  at which time the market value and book value will be zero. Before-tax cash flow (BTCF) will be+$18,000 per year over the six-year life of the vehicle. (7.9)

a. Use straight-line depreciation, an effective income tax rate of 40% and an after-tax MARR of 12% to determine the present worth of the investment.

b. What is the after-tax internal rate of return?

c. Is this vehicle a sound investment? Explain your answer.

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(a) Refer to Figure 7-5 for a template for determining the after-tax cash flow of the vehicle:

EOY

 BTCF Depreciation Taxable Income Income Tax

ATCF

0

 –$84,000 – – – –$84,000
1–6 18,000 $14,000 $4,000 –$1,600

16,400

8

 0 – – 0

PW(12%)  =  –$84,000 + $16,400 (P/A, 12%, 6) = –$16,573

(b)  0  =  –$84,000 + $16,400 (P/A, \acute{i} %, 6)

From Goal Seek in Excel, \acute{i} % = 4.7%

Goal Seek Setup:

Cell A1 = 0.12 (initial guess)

Cell B1 = –84000 + PV(A1, 6, –16400)
Set Cell B1 = 0 by changing Cell A1

(c) This vehicle is not a smart investment because the PW  is negative,  the  IRR   is  much  less  than  the  MARR,  and  the payback period is six years (too long).

figure 7-5 new

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