An office supply company has purchased a light duty delivery truck for $18,000. The truck will be depreciated under the MACRS with a property class of five years. The truck’s MV is expected to decrease by $3,000 per year. It is anticipated that the purchase of the truck will increase the company’s

Question

An office supply company has purchased a light duty delivery truck for $18,000. The truck will be depreciated under the MACRS with a property class of five years. The truck’s MV is expected to decrease by $3,000 per year. It is anticipated that the purchase of the truck will increase the company’ srevenue by $10,000 annually, whereas the associated operating expenses are expected to be $3,500 annually. The company has an effective income tax rate of 40%, and its after-tax MARR is 15% per year. If the company plans to keep the truck only two years, what would be the equivalent after-tax annual worth of this investment?

Accepted Answer

EOY	(A) BTCF	(B) Depr.	(C) = (A) − (B) TI	(D) = −t(C) T (40%)	(E) = (A) + (D) ATCF
0 1 2a 2b	–$18,000 6,500 6,500 12,000	— $3,600 2,880	— $2,900 3,620 480	— –$1,160 −1, 448 −192	–$18,000 5,340 5,052 11,808

[latex]d_{2}[/latex] = = $18,000(0.32)(0.5) = $2,880
[latex]BV_{2}[/latex] = $18,000 – $3,600 – $2,880 = $11,520
[latex]MV_{2}[/latex] = $18,000 – $3,000(2) = $12,000
PW(15%) = –$18,000 + $5,340(P/F, 15%, 1) + ($5,052+ $11,808)(P/F, 15%, 2) = –$608.49
AW(15%) = –$608.49(A/P, 15%, 2) = –$374.28 < 0,
so the investment is not a profitable one

Question 7.P: An office supply company has purchased a light duty delivery...

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