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 $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,700. Use of the truck will require an increase in NWC (spare parts inventory) of $2,700. The truck will have no effect on revenues, but it is expected to save the firm $16,700 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?

Explanation / Answer

All Amounts in $ Cash Flows for Project Particulars Year Year Year Year 0 1 2 3 Cost of Truck -50000 Increase in NWC -2700 Savings in Labor Costs 16700 16700 16700 Depreciation on Truck 9766 13024 4339 Net Gains before Taxes 6934 3676 12361 Tax Impact @ 35% 2427 1287 4326 Profits after taxes 4507 2389 8034 Add : Depreciation 9766 13024 4339 Net Cash Inflows 14273 15413 12374

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