Suppose I wish to start my own delivery service. I buy a light truck for $75,000. At the end of year zero, I purchase the truck with a 3 year loan, with 20% down, at an interest rate of 9%. Payments are scheduled to be made at the end of years 1, 2, and 3. The truck is placed in service at the beginning of year 1. Driver expenses are $25,000 per year. Gas and maintenance costs are $10,000 per year. Income from deliveries is $100,000 per year. At the end of year 2, I tire of the business, sell the truck for $53,000, and pay off the loan early. Assuming MACRS depreciation, and a marginal tax rate of 34%.
Note: light truck belongs to MACRS property classification of 5-year recovery period (20%, 32%, 19.20%, 11.52%, 11.52%, 5.76%)
1. Determine the depreciation recapture in year 2.
2. Find the loan pay-off amount immediately after the second loan payment is made.
3. Find the cash flows for years 0, 1, 2.
4. Find the IRR for the project.