You are analyzing the purchase of new equipment. Since you are not an expert on

Question

You are analyzing the purchase of new equipment.

Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations.

The consultant charged you $1,500 and recommended the purchase of the latest model from Equipment Corp. of America.

The equipment costs $80,000, and it will cost another $10,000 to modify it for special use by your firm.

The equipment will be depreciated on a straight-line basis over six years with no salvage value. You expect the equipment will be sold after three years for $28,000.

Use of the equipment will require an increase in your company

Explanation / Answer

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. Since you are not an expert on industrial vehicles, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of a model CP8 truck. The truck's basic price is $40,000, and it will cost another $10,000 to modify it for special use by your firm. The truck will be depreciated using IRS guidelines that require depreciation expense equal to 33% of the initial depreciable value in year one, 45% of the initial depreciable value in year two, and 15% of the initial depreciable value in year three. The company expects to sell the new truck after three years for $20,000. Use of the truck will require an increase in the company's net working capital of $2,000, but this $2,000 may be recovered at the end of year three. The truck will have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40%. What is the initial outlay required to fund this project? ANSWER Initial outlay : Ignore consulation fee of $1500 as it has already been spent basic price of $40,000 modification $10,000 working capital $2,000 Total = 52,000. It is possible to work out the Net present Value of the truck with the information provided

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