Thompson’s Tree Farm is considering the replacement of its large delivery tractor and trailor. The old...

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Thompson’s Tree Farm is considering the replacement of its largedelivery tractor and trailor. The old truck originally cost $60,000 when it was purchased one year ago.It is being depreciatedover a six year life to zero book value.Thompson believes that theremaining useful life of the old truck is five years after which itwill have a resale value of zero.The company can sell the truck nowfor$ 14,000.
        The new truck willcost $90,000 and will be depreciated over a five year period to azero book value.At the end of five years it will be sold for$20,000.The new truck will produce cash savings of $ 23,000.Thecompany’s tax rate is 40% and uses straight line depreciation.Therequired rate of return for the project is 10%.
          a.Findthe project’s initial outlay.
         b.Find theproject’s operating and terminal cash flows from years 1through5.
         c.Evaluate theproject usingNPV.
answers
In?tial outlay= $61,600 NOCF= $17,000   Terminal CF= $12000
NPV= $10,294

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a Cost of the new truck 90000 Less After tax sale value of the old truck Sale value 14000 Book value 600006000061 50000 Loss on sale 36000 Tax See Answer

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Thompson’s Tree Farm is considering the replacement of its largedelivery tractor and trailor. The old truck originally cost $60,000 when it was purchased one year ago.It is being depreciatedover a six year life to zero book value.Thompson believes that theremaining useful life of the old truck is five years after which itwill have a resale value of zero.The company can sell the truck nowfor$ 14,000. The new truck willcost $90,000 and will be depreciated over a five year period to azero book value.At the end of five years it will be sold for$20,000.The new truck will produce cash savings of $ 23,000.Thecompany’s tax rate is 40% and uses straight line depreciation.Therequired rate of return for the project is 10%. a.Findthe project’s initial outlay. b.Find theproject’s operating and terminal cash flows from years 1through5. c.Evaluate theproject usingNPV. answersIn?tial outlay= $61,600 NOCF= $17,000 Terminal CF= $12000NPV= $10,294