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 $70,000. The truck falls o the MACRS three-year class, and it will be sold after three years for $5,000. Use of the truck will require an increase in NWC (spare parts inventory) of $10,000. The truck will have no effect on revenues, but it is expected to save the firm $32,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the operating cash flow for this project be during year 2?

Explanation / Answer

Depreciation in year 2 = 44.45%

Depreciation expense = 44.45%*70000= 31115

Operating cash flow = (before tax operating benefits- depreciation)*(1-tax)+ depreciation

= (32000-31115)*(1-40%) + 31115= $31646

c) 31,646

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