Example 3-7: Jeremy Pruitt Ltd is considering the replacement of a delivery truck. The current truck could last for three more years. Operating costs are 5000 per year. We are currently depreciating it at 4000 per year. We could sell it at the end of the three years for 2000 with a book value of zero. If we purchase the new truck for 32000 we could use three year MACRS. We could sell the old truck now for 7000. Operating costs would drop to 1000 per year. We can sell the new truck for 15000 at the end of the third year. The tax rate is 40%. The WACC is 10%. Should we replace the truck?

Putting it all together

Year 0: (32000) + 9000 = (23000)

Year 1: 2400 + 2666.24 = 5066.24

Year 2: 2400 + 4089.6 = 6489.6

Year 3: 2400 + 295.68 +9948.48 + (1200) = 11444.16

The NPV of this is (4432.86), so we should not buy.

Using a BA II Plus, I am entering the cashflows as CF0-(23000), CF1-5066.24, CF2-6489.60, CF3-11,444.16, I-.10, but my answer is way off from the correct answer of (4432.86). I got (52.28) What am I doing wrong with this problem?