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 into the MACRS 3-year class, and it will be sold after three years for $20,800. Use of the truck will require an increase in NWC (spare parts inventory) of $2,800. The truck will have no effect on revenues, but it is expected to save the firm $23,600 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent.

What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

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 into the MACRS 3-year class, and it will be sold after three years for $20,800. Use of the truck will require an increase in NWC (spare parts inventory) of $2,800. The truck will have no effect on revenues, but it is expected to save the firm $23,600 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent.

Explanation / Answer

working notes:

Cash flows at 0 year:

Initital investment ( truck cost) = $ 70,000

Increase in working capital = $ 2,800

Total cash flow at 0 year = $ 72,800

Operating Cash flow for year 1,2 and 3: ( operating):

Terminal Cash flows:

  

working capital recovered at the end : $2,800

year 0 1 2 3 FCF ( Working note) -$72,800 $23,509 $26,155 $19,100 +$15,494 +$2,800

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