You have been asked to evaluate the proposed acquisition of a new special-purpos

Question

You have been asked to evaluate the proposed acquisition of a new special-purposetruck. Since you are not an expert pn industrial vehicles, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommendes the purchase of Model CP8 truck. The truck base price if $40,000, and it will cost another $10,000 to modify it for special use by the firm. The truck will be depreciated using IRS guidelines the requiredepreciation expense equal to 33%of the initial depreciable value in year 1, 45% of the initial depreciable value in year 2 and 15% of the initial depreciablevalue in year 3. The company expects to sell the 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 3. 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?

a. $50,000

b. $51,500

c. $52,000

d. $53,500

Explanation / 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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