HKYeh Logistics Ltd. is considering purchasing 20 new delivery trucks to increase its delivery capacity. Each truck costs $350,000, and an additional $10,000 is needed for various installation charges such as putting on the logo and other onboard equipment. According to the company's accounting policy, the trucks will be depreciated straight-line to zero over an 8-year period. Each truck is expected to generate an additional yearly revenue of $100,000 and a cash operating expense of $45,000. Each of the trucks is expected to be sold for $70,000 after eight years. HKYeh's yearly tax rate is 16.5% and the required rate of return is 15% per year. As an analyst in the firm's strategic investment division, you are asked to help the board of directors decide whether to go ahead with the project. (a) Compute the initial investment of this project. (b) Compute the present value of after-tax annual operating cash income from this project. Compute the present value of tax savings from depreciation on assets.
HKYeh Logistics Ltd. is considering purchasing 20 new delivery trucks to increase its delivery capacity. Each truck costs $350,000, and an additional $10,000 is needed for various installation charges such as putting on the logo and other onboard equipment. According to the company's accounting policy, the trucks will be depreciated straight-line to zero over an 8-year period. Each truck is expected to generate an additional yearly revenue of $100,000 and a cash operating expense of $45,000. Each of the trucks is expected to be sold for $70,000 after eight years. HKYeh's yearly tax rate is 16.5% and the required rate of return is 15% per year. As an analyst in the firm's strategic investment division, you are asked to help the board of directors decide whether to go ahead with the project. (a) Compute the initial investment of this project. (b) Compute the present value of after-tax annual operating cash income from this project. Compute the present value of tax savings from depreciation on assets.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:HKYeh Logistics Ltd. is considering purchasing 20 new delivery trucks to increase its delivery
capacity. Each truck costs $350,000, and an additional $10,000 is needed for various installation
charges such as putting on the logo and other onboard equipment. According to the company's
accounting policy, the trucks will be depreciated straight-line to zero over an 8-year period. Each
truck is expected to generate an additional yearly revenue of $100,000 and a cash operating expense
of $45,000. Each of the trucks is expected to be sold for $70,000 after eight years. HKYeh's yearly
tax rate is 16.5% and the required rate of return is 15% per year.
As an analyst in the firm's strategic investment division, you are asked to help the board of directors
decide whether to go ahead with the project.
(а)
Compute the initial investment of this project.
(b)
Compute the present value of after-tax annual operating cash income from this project.
(c)
Compute the present value of tax savings from depreciation on assets.
(d)
Compute the present value of the after-tax resale value of the trucks.
(e)
Based on the NPV method, should the project be accepted?
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