You have been asked by the president of your company to evaluate the proposed ac
ID: 2739936 • 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 $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,400. Use of the truck will require an increase in NWC (spare parts inventory) of $2,400. The truck will have no effect on revenues, but it is expected to save the firm $16,800 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 $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,400. Use of the truck will require an increase in NWC (spare parts inventory) of $2,400. The truck will have no effect on revenues, but it is expected to save the firm $16,800 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent.
Explanation / Answer
Calculate the cash flows for this project:
Year
0
1
2
3
Net cash
flows
Free cash flows
$ (52,400)
$ 16,800
$ 16,800
$ 16,800
$ (2,000)
Salvage value
$ 20,400
$ 20,400
Net cash flows
$ 18,400
Therefore, net cash flows are $18,400.
Note: Assume marginal tax not considered.
Year
0
1
2
3
Net cash
flows
Free cash flows
$ (52,400)
$ 16,800
$ 16,800
$ 16,800
$ (2,000)
Salvage value
$ 20,400
$ 20,400
Net cash flows
$ 18,400
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