Question
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
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 companys 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. HKYehs yearly tax rate is 16.5% and the required rate of return is 15% per year.
As an analyst in the firms strategic investment division, you are asked to help the board of directors decide whether to go ahead with the project
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(a) Compute the initial investment of this project. (3 marks)
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(b) Compute the present value of after-tax annual operating cash income from this project.
3.(c) Compute the present value of tax savings from depreciation on assets.
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(d) Compute the present value of the after-tax resale value of the trucks.
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(e) Based on the NPV method, should the project be accepted?
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