You have been asked by the president of your company to evaluate the proposed ac
ID: 2710254 • 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 $320,000. The truck falls into the MACRS 10-year class, and it will be sold after 10 years for $57,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,700. The truck will have no effect on revenues, but it is expected to save the firm $68,000 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? $14,248 $90,280 $60,328 $32,000
Explanation / Answer
The cash flow during the third year has been calculated with the use of following table:
_______
Notes:
1) Depreciation rate for a 10 year class property rate during year 3 would be 14.40% (refer to the MACRS table).
2) Depreciation is calculated on the cost of the truck. Salvage value is not to be taken into consideration.
Savings in Costs 68,000 Less Depreciation (320,000*14.40%) 46,080 Savings after Depreciation 21,920 Less Taxes (21,920*35%) 7,672 Savings after Taxes 14,248 Add Depreciation 46,080 Cash Flow During Year 3 $60,328 (which is Option C)Related Questions
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