You have been asked by the president of your company to evaluate the proposed ac
ID: 2653839 • Letter: Y
Question
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $410,000. The truck falls into the MACRS 3-year class, and it will be sold after 3 years for $66,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,600. The truck will have no effect on revenues, but it is expected to save the firm $120,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 35 percent. What will the cash flows for this project be during year 3?
$38,531
$99,252
$138,721
$136,667
Please show work so I know how to work the problem for future problems.
Explanation / Answer
Answer
Year
Truck value
Depreciation rate as per MACRS 3 year
Depreciation
Depreciation tax saving
A
B
C
A*B
C* tax rate
1
410000
0.3333
136653
47828.55
2
410000
0.4445
182245
63785.75
3
410000
0.1481
60721
21252.35
4
410000
0.0741
30381
10633.35
Year 3 Cash flow
Figures in $
Particulars
Amount
After tax saving in operating cost
a
78000
(120000*0.65)
Tax saving in depreciation
b
21252.35
(See table: Year 3)
Total cash flow
a+b
99252.35
Answer : $99,252
Note : answer will change if release of NWC (spare parts inventory) and capital gain on sale of truck is considered in year 3.
Year
Truck value
Depreciation rate as per MACRS 3 year
Depreciation
Depreciation tax saving
A
B
C
A*B
C* tax rate
1
410000
0.3333
136653
47828.55
2
410000
0.4445
182245
63785.75
3
410000
0.1481
60721
21252.35
4
410000
0.0741
30381
10633.35
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