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 $220,000. The truck falls into the MACRS 3-year class, and it will be sold after 3 years for $22,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,200. The truck will have no effect on revenues, but it is expected to save the firm $100,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the cash flows for this project be during year 2?

$99,116

$94,800

$157,790

$2,210

Explanation / Answer

All Amounts in $ Depreciation under MACRS Class Book Value of Truck = $ 220,000 - $ 22,000 = $ 198,000 Year Depreciation Depreciation Rate Value 1 33.33% 65993.4 2 44.45% 88011 3 14.81% 29323.8 4 7.41% 14671.8 Cash Flows from Project for Year 2 Savings in Pre Tax Operating Costs 100000 Less : Depreciation 88011 Income before Taxes 11989 Less : Tax Impact @ 40% 4795.6 Net Operating Income 7193.4 Add : Depreciation 88011 Operating Cash Flow - Year 2 95204.4 Since $ 94,800 is closest to this value, hence that is considered as the correct solution.

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