Name : Annisa Leha

NIM : 2201761134

Assignment CFM: Capital Budgeting

Schick Construction is considering the purchase a new tandem box dump truck. The truck cost $
95,000, and an additional $ 5,000 in needed to paint it with the firm logo and install radio
equipment. Assume the truck fall into the MACRS three-year class. The truck will generate no
additional revenues, but it will reduce cash operating expenses by $ 35,000 per year. The truck
will sold for $ 40,000 after its five-year life. An inventory investment of $ 4,000 is requiring
during the life of the investment. Schick is in the 45% income tax bracket.

a. What is the net investment or initial cash flow?

b. What is after tax net operating cash flow for each of the five years?
c. What is the after-tax salvage value?
d. Assuming a 10% cost of capital, what is the NPV of this investment?

Answers :

a. Net investment or initial cash flow is $ 104,000

Cost of truck $ 95,000
Additional cost $ 5,000
Inventory investment $ 4,000
Total $ 104,000

b. After tax net operating cash flow for each of the five years

year 1 year 2 year 3 year 4 year 5

After-tax savings $ 19,250 $ 19,250 $ 19,250 $ 19,250 $ 19,250
Depreciation tax saving $ 14,999 $ 20,003 $ 6,665 $ 3,335 $ 0
Net cash flow $ 34,249 $ 39,253 $ 25,915 $ 22,585 $ 19,250

Notes :

- The after-tax cost saving is $ 35,000 (1-0.45) = $ 35,000 (0.55)

= $ 19,250
- The depreciation expense in each year is the depreciable basis, $ 100,000. Time
the MACRS allowance of 33.33%, 44.45%, 14.81%, and 7.41% for each years
respectively and on year 5 there is no depreciation. The depreciation tax savings
is calculated as the tax rate 45% times the depreciation expense in each year.
 c. After-tax salvage value
Salvage value $ 40,000
Tax on salvage value ($ 40,000 x 45%) ( 18,000)
Total salvage value of truck $ 22,000

Total salvage value of truck $ 22,000

Return on NWC (inventory investment) $ 4,000
Total salvage value $ 26,000

d. NPV of this investment is $ 22,568

Year Net Cash Flow PV @ 10%

0 $ -104,000 $ -104,000
1 $ 34,249 $ 31,135
2 $ 39,253 $ 32,440
3 $ 25,915 $ 19,470
4 $ 22,585 $ 15,426
5 $ 45,250 * $ 28,097
NPV $ 22,568
Notes :

cash flow year 5 $ 19.250

after-tax salvage value
of truck $ 22.000
return of NWC $ 4.000
$ 45.250