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Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,200 apiece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $31,000 each in the configuration you want them, and can be depreciated using MACRS over a 5-year life. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $3,900 each. If your cost of capital is 8 percent and your firm faces a 34 percent tax rate, what will the cash flows for this project be?

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Answer:

initial cash outlay (year 0) = -$144,440

cash flow year 1 = $23,410

cash flow year 2 = $29,734

cash flow year 3 = $22,988.40

cash flow year 4 = $18,941.04

cash flow year 5 = $18,941.04

cash flow year 6 = $15,905.52

Explanation:

initial cash outlay (year 0) = (-$31,000 x 5) + ($3,200 x 5 x 0.66) = -$155,000 + $10,560 = -$144,440

cash flow year 1 = {[($3,900 x 5) - ($155,000 x 20%)] x (1 - 34%)} + ($155,000 x 20%) = $23,410

cash flow year 2 = {[($3,900 x 5) - ($155,000 x 32%)] x (1 - 34%)} + ($155,000 x 32%) = $29,734

cash flow year 3 = {[($3,900 x 5) - ($155,000 x 19.20%)] x (1 - 34%)} + ($155,000 x 19.20%) = $22,988.40

cash flow year 4 = {[($3,900 x 5) - ($155,000 x 11.52%)] x (1 - 34%)} + ($155,000 x 11.52%) = $18,941.04

cash flow year 5 = {[($3,900 x 5) - ($155,000 x 11.52%)] x (1 - 34%)} + ($155,000 x 11.52%) = $18,941.04

cash flow year 6 = {[($3,900 x 5) - ($155,000 x 5.76%)] x (1 - 34%)} + ($155,000 x 5.76%) = $15,905.52

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