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Answer:
Hi, well, the answer is as follows:
Cash Flow
Item 0 Year 1 Year 2 Year 3 Year
Final Cash Flow -$72.500,00 $23.420,70 $26.100,25 $33.978,90
Step-by-step explanation:
In order to get the answer we have to do 2 things, first, we need to construct a marginal profit statement and with that, we can find the final cash flow of this project.
Constructing the Marginal Profit statement.
Savings
We start by just adding from year 0 to 3 the savings, since it will save money to the company, it is clear that its earnings before taxes will increase too, so in our statement, all savings will add to the marginal profit. It should look like this.
Marginal Profit Statement
Item 0 Year 1 Year 2 Year 3 Year
Savings $23.400 $23.400 $23.400
Depreciation.
Under MACRS 3 year class depreciation, we need to find the annual depreciation for each year.
MACRS 3 yr depreciation
1 2 3 4
Item Amount 33,33% 44,45% 14,81% 7,41%
Cost $70.000
Annual Depreciation -23.331 -31.115 -10.367 -5.187
What this means is that in year 1 the truck´s depreciation is equivalent to 33.33% of the original cost of the truck, in year 2 it will be 44.45% and so forth.
Then we find the Marginal profit before taxes by subtracting the depreciation from the savings. From there, we calculate the taxes,which are 35% of the marginal profit before taxes, therefore obtaining out marginal profit.
Marginal Profit Statement
Item 0 Year 1 Year 2 Year 3 Year
Savings $23.400 $23.400 $23.400
Depreciation -$23.331 -$31.115 -$10.367
Marginal Profit before taxes $69 -$7.715 $13.033
Taxes -$24 $2.700 -$4.562
Marginal Profit $45 -$5.015 $8.471
From here we need to construct the cash flow of the project, which will begin with the Marginal profit and subsequently add the annual depreciation expenses for every year. It should look like this.
Cash Flow
Item 0 Year 1 Year 2 Year 3 Year
Marginal Profit $45 -$5.015 $8.471
(+) Depreciation $23.331 $31.115 $10.367
Gross Cash Flow $23.376 $26.100 $18.838
Now, to the next part, we need to subtract the initial investment (truck cost and its spare parts) which will go under year 0 and in year 3, since we are going to sell the truck for $20,500, and we will profit out of it, we have to pay taxes too. The way to find out how much we need to pay is by subtracting the accumulated depreciation from the amount that we are selling the truck. That results into the profit of this operation, that means that 35% of that profit is equivalent to the taxes that are required to pay for selling this asset. To this point, it should look like this.
Cash Flow
Item 0 Year 1 Year 2 Year 3 Year
Marginal Profit $45 -$5.015 $8.471
(+) Depreciation $23.331 $31.115 $10.367
Gross Cash Flow $23.376 $26.100 $18.838
Investment
(-)All P Truck -$70.000
(-)Spare Parts -2500
Sell Truck For $20.500
Book Value $5.187
Taxes -$5.360
Money Received $15.140
Final Cash Flow -$72.500,00 $23.420,70 $26.100,25 $33.978,90
In year 0 all we have is money outflows, therefore our cash flow is a - 72500, in years 1 and 2 the gross cash flow is the same as the final cash flow, but in year 3, we have to add the gross cash flow to the money received (not to the 20,500 we sold the truck for) in order to get that year´s cash flow.
please check out the attached excel spreadsheet for more details.
Best of luck,
The cash flow for the project for each year will be $-72500, $23375.85, and $26100.25.
How to compute the cash flow?
The cash flow for year 0 will be:
= -$70000 - $2500
= -$72500
The cash flow for year 1 will be:
= Cost saving × (1 - Tax rate) + Truck cost × MACRS + Tax rate
= $23400 × (1 - 35%) + $70000 × 33.33% × 35%
= $23375.85
The cash flow for year 2 will be:
= $23400 × (1 - 35%) + $70000 × 44.45% × 35%
= $26100.25
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