Fagen Grocery Store Is Considering the Purchase of a New

question 112

Multiple Choice

Fagen Grocery Store is considering the purchase of a new $45,000 delivery truck. The truck will have a useful life of 5 years, no terminal salvage value, and tax amortization will be calculated using the straight-line method.
If the truck is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the truck, but out-of-pocket expenses will also increase by $67,500 per year.
Assume a tax rate of 30 percent and a required after-tax rate of return equal to 10 percent.
Time value factors are given below for 5 years and an interest rate of 10 percent.

-What is the net present value of the tax savings from depreciation?

• A) $3,912
• B) $23,881
• C) $10,235
• D) $1,677

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Definitions:

Kilo-

A prefix in the metric system denoting a factor of one thousand.

Ounce

A unit of weight in the avoirdupois system, equal to 1/16 of a pound or approximately 28.35 grams.

Abbreviation

A shortened form of a word or phrase used to simplify written and verbal communication.

Pound

A unit of weight in the British imperial and the United States customary systems of measurement, equal to 16 ounces.