You have been asked by the president of your company to evaluate the proposed ac
ID: 2745510 • 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 $19,700. Use of the truck will require an increase in NWC (spare parts inventory) of $1,700. The truck will have no effect on revenues, but it is expected to save the firm $17,000 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? (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 $19,700. Use of the truck will require an increase in NWC (spare parts inventory) of $1,700. The truck will have no effect on revenues, but it is expected to save the firm $17,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 35 percent.
Explanation / Answer
TaxRate 35% Year(t) 0 1 2 3 Cost of Truck(cost) 50,000 Investment(=cost) 50,000 Savings(s) 17,000 17,000 17,000 MACRS DepreciationRate 33.33% 44.45% 14.81% Depreciation(d=MACRS Rate*Investment) 16665.00 22225.00 7405.00 EBIT(=s-d) 335.00 -5,225.00 9,595.00 Working Capital(WcInv) 1,700 1,700 1,700 1,700 chg in WorkingCapital(w) 0 0 0 OperatingCashFlows(=EBIT*(1-TaxRate)+d-w)=CFO 16,882.75 18,828.75 13,641.75 OperatingCashFlows(=s*(1-TaxRate)+d*TaxRate)=CFO 16,882.75 18,828.75 13,641.75 SalvageValue(MV) 19,700 Book Value(BV=Investment-Total Depreciation) 50,000 33,335 11,110 3,705 TerminalCF (=WcInv+MV-TaxRate*(MV-BV))=CFT 15,801.75 Initial Outlay(=-(Investment+WcInv))=CFi -51,700 Net CashFlows/year, CF=CFO+CFT+CFi -51,700.00 16,882.75 18,828.75 29,443.50
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.