Answered: Year Annual After-Tax Cash Flow…

Year Annual After-Tax Cash Flow Abandonment Value ($22,500) 6,250 $17,500 14,000 11,000 2 6,250 3 6,250 6,250 5,000 6,250

SWFT Comprehensive Volume 2019

42nd Edition

ISBN:9780357233306

Author:Maloney

Publisher:Maloney

Chapter28: Income Taxati On Of Trusts And Estates

Section: Chapter Questions

Problem 13CE

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

The Scampini Supplies Company recently purchased a new
delivery truck. The new truck costs $22,500, and it is expected to generate after-tax cash
flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The
expected year-end abandonment values (salvage values after tax adjustments) for the truck
are given here. The company’s WACC is 10%.

a. Should the firm operate the truck until the end of its 5-year physical life; if not, what is
the truck’s optimal economic life?
b. Would the introduction of abandonment values, in addition to operating cash flows,
ever reduce the expected NPV and/or IRR of a project? Explain.

Year
Annual After-Tax Cash Flow
Abandonment Value
($22,500)
6,250
$17,500
14,000
11,000
2
6,250
3
6,250
6,250
5,000
6,250

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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