Question

Your company may buy a used pick-up for $20,000. During the truck's five year useful life, it is estimated the firm will save $5,000 per year after all of the costs of owning and operating the truck have been paid. The truck's salvage value is estimated to be $3,000. Assume straight line depreciation and a tax rate of 35%. Assume r of 10%.Create a model that will calculate before-tax and after-tax cash flows.

Answer 1

Answer:

Please see explanation

Explanation:

The before tax and after tax cash flow calculation can be made through below mentioned model:

                       0                 1             2                 3                 4                   5  

Pick-up cost  (20,000)

Saving to firm               5,000       5,000         5,000          5,000          5,000

Salvage value                                                                                            3,000

Pre tax CF      (20,000) 5,000       5,000        5,000          5,000          8,000

[email protected]%                       (1,750)      (1,750)        (1,750)         (1,750)        (2,800)                    

Tax saving on dep         1,190         1,190          1,190            1,190           1,190

((20,000-3000)/5*35%)

After tax CF ($20,000)  $4,440     $4,440     $4,440        $4,440       $6,390