You have been asked by the president of your company to evaluate the proposed ac

Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $370,000. The truck falls into the MACRS 3-year class, and it will be sold after 3 years for $62,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,200. The truck will have no effect on revenues, but it is expected to save the firm $100,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the cash flows for this project be during year 3?

Explanation / Answer

Depreciation Depreciable basis 370000 MACRS Year Percent Basis Depreciable basis Depreciation 1 0.33 370000 122100 2 0.45 370000 166500 3 0.15 370000 55500 4 0.07 370000 25900 Year 3 Cashflows Before tax cost reduction 100000 After Tax cost reduction (A) 60000 (100000*(1-0.4)) Depreciation 55500 Tax Savings on Depreciation (B) 22200 (55500*0.4) Net Operating Cashflow for Year 3 (A+B) 82200

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