Question 4 (25 marks)

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.

(a) Compute the initial investment of this project. (3 marks)

(b) Compute the present value of after-tax annual operating cash income from this project. (5 marks)

(c) Compute the present value of tax savings from depreciation on assets. (5 marks)

(d) Compute the present value of the after-tax resale value of the trucks. (5 marks)

(e) Based on the NPV method, should the project be accepted? (7 marks)