Reference no: EM132954287
Question - ABC Co has a 5-year-old delivery truck that cost $80,000. The current value of the truck is about $25,000 and a book value of $4,000 and would be fully depreciated by the end of next year. The estimated selling cost is $2,000. The old truck has annual repair and maintenance costs of about $8,000 per year. It is estimated that the old truck will last another 6 years but will require an additional $15,000 for a major overhaul in three years from now. The truck should be worth about $8,000 at the end of the next six years.
The truck gets about 6 miles per gallon. There are two employees who operate the truck: a driver that earns $14 per hour and a laborer who helps with deliveries that earns $12 per hour (fully burdened). These drivers work a total of 2,000 hours per year and drive about 36,000 miles per year.
ABC is considering the purchase of a new fuel-efficient truck with a lift gate. The new truck will save about 200 hours per year delivery time. The new truck is rated to get 10.5 miles per gallon. It has a 5-year warranty and thus should have no repairs for the first 5 years but will require normal maintenance of about $1,000 per year. Repair and maintenance costs in the sixth year should be around $6,000.
The new truck will cost $92,000 plus tax, license, dealer prep, and delivery charges of $7,500. Additionally, ABC would spend $2,000 having the company logo and colors painted on the truck. ABC would plan on keeping the truck for 6 years and then selling it. It is estimated that the six-year-old truck will be worth $45,000 and the selling cost will be $3,000. ABC will depreciate the truck using 5-year MACRS.
Fuel cost averaged $2.40 per gallon last year, but it is estimated that fuel costs will increase by about 10% per year. Wages should rise by about 5% per year to stay ahead of inflation. The cost of capital (WACC) for ABC is 15%. The effective tax rate for ABC is 35%.
Required - What is the taxable cash income in year 1?
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