Bar T Ranches, Inc. is considering buying a new helicopter for $350,000.

The company's old helicopter has a book value of $85,000, but will only bring $60,000 if it is sold.
The old helicopter can be depreciated at the rate of $13,500 per year for the next four years.
The new helicopter can be depreciated using the 5-year MARCS schedule.
The new helicopter is expected to save $62,000 after taxes through reduced fuel and maintenance
a. What is the cash inflow from selling the old helicopter?
b. What is the net cost of the new helicopter?
c. Calculate the incremental depreciation of the new helicopter
d. Calculate the net cash flows for the purchase
e. Calculate the net present value of the helicopter purchase and state whether or not the firm sho

Cash inflow from selling old helicoter

$60000

Net Cost of New Helicopter

Cost of new helicopter less cash inflow from the sale of old helicopter
290000

Incremental depriciation of new helicopter

Calculating deprication for new helicopter on the basis of MARCS
Year Table Depriciation on new helicopter Depriciation on Old Helicopter
1 20% 70000 13500
2 32% 112000 13500
3 19.20% 67200 13500
4 11.50% 40250 13500
5 11.50% 40250 13500
Total 329700 67500
Incremental Depriciation 262200

Calculating Net cash flows for the purchases

Yr 1 2 3
Saving 62000 62000 62000
Deprication 70000 112000 67200
Cash Flow 132000 174000 129200

Calculating NPV
year Cash flows Present value @12% Present value
0 -350000
1 132000 0.89 117862.8
2 174000 0.8 138712.8
3 129200 0.71 91964.56
4 102250 0.64 64979.88
5 102250 0.57 58016.65
471536.69
NPV 121536.69

The project should be considered

bring $60,000 if it is sold.
r the next four years.

uced fuel and maintenance expenses. Bar T Ranches is in the 34% tax bracket and has a 12% cost of capital

whether or not the firm should buy it.

n Old Helicopter

4 5
62000 62000
40250 40250
102250 102250

62000 55359.8
62000 49426.4
62000 44131.6
62000 39401
62000 35178.8
a 12% cost of capital.