Lynda's Fruit Company located in Victoria is considering the purchase of a new fleet of trucks to be used in the delivery of fruit and vegetables. If it goes through with the purchase it will spend $400,000 on eight trucks. The new vehicles will be kept for 5 years, during which time they will be depreciated toward a $40,000 salvage value using straight line depreciation. They are expected to have a market value equal to their salvage value in 5 years. The new trucks will be used to replace the company's older fleet of 8 trucks, which are fully depreciated but can be sold for an estimated $20,000. Because the vehicles have a current book value of zero, the selling price is fully taxable at the firm's 30% tax rate. The existing fleet is expected to be usable for 5 more years, after which time the vehicles will have no salvage value. The existing fleet uses $200,000 per year in diesel fuel, whereas the new, more efficient fleet will use only $150,000. In addition, the new fleet will be covered under warranty, so the maintenance costs per year are expected to be only $12,000 compared to $35,000 for the existing fleet.

Revenue, cost of goods sold and other operating expenses remain the same at $1,000,000, $300,000 and $100,000 respectively.

1) What is the initial outlay required to replace the existing fleet with the newer fleet?

2) What are incremental operating cash flow savings per year during years 1 to 5 for the new fleet?

3) Sketch a timeline for the replacement project cash flows for years 0 to 5.

4) If Lynda's requires a 15% discount rate for the new investments, should the fleet be replaced?

5) If the discount rate decreases, would the fleet be replaced? Give an example. Hint: This is an open-ended question, you may have different but correct answers.

6) Optional complex question - you will get additional marks over the 150 marks for completing this question correctly: As the revenue, cost of goods sold and other operating costs stay the same, what could be the shorter alternative for calculating the incremental cash flow?

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Status NEW Posted 11 May 2017 08:05 AM My Price 8.00

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