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. 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 terminal cash flow for this project?
$16,000
$19,200
$15,400
$16,800

Explanation / Answer

$15,400

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