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 60,000. The truck falls into the MACRS 3 year class, and it will be sold after three years for 14,000. Use of the truck will require an increase in NWC of 3,000. The truck will have no effect on revenues but it is accpected to save the firm 20,000 per year in before -tax operating cost. The firms marginal tax rate is 40%. What will the cash flows for this project be during year 3?

Please HELP!

Explanation / Answer

cash flow from operating profit before tax = 20000

Less: Tax= 20000*0.40 = 8000

Add:Depreciation Tax shield =60000*14.81%*40% = $3554.40

cash flow from operating profit after tax = 15554.40

Add: NWC realised at end of 3year =3000

Add; Post tax salvage value = 14000-(14000-4446)*40% =$10,178.40

Total cash flow during year3 =15,554.40+3000+10,178.40 = $28,732.80

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