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 $19,000. Use of the truck will require an increase in NWC (spare parts inventory) of $1,000. The truck will have no effect on revenues, but it is expected to save the firm $24,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 39 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 $19,000. Use of the truck will require an increase in NWC (spare parts inventory) of $1,000. The truck will have no effect on revenues, but it is expected to save the firm $24,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 39 percent.

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 MACRS Rate   33.33% 44.45% 14.81% Truck Cost               70,000.0 Depreciations          23,331.00          31,115.00           10,367.00 Total Depreciation               64,813.0 Book Value at Yr 3 end                 5,187.0 Resale value of truck               19,000.0 Capital Gain               13,813.0 Tax on Capital gain @39%                 5,387.1 Assuming investment in NWC in spares is returned when truck is sold Details Year 0 Year 1 Year 2 Year 3 Truck Purchase cost            (70,000.0) Investment in NWC               (1,000.0)                1,000.0 Saving in Cost            24,000.00          24,000.00           24,000.00 Depreciation=       (23,331.00)        (31,115.00)         (10,367.00) Taxable income                  669.00          (7,115.00)           13,633.00 Tax @39%             (260.91)            2,774.85           (5,316.87) Add Resales value              19,000.0 less Tax on capital gain              (5,387.1) Post Tax Income                408.09          (4,340.15)           21,929.06 Add Back Depreciation          23,331.00          31,115.00           10,367.00 Net Cash Flow with NWC return              (71,000.0)          23,739.09          26,774.85           33,296.06 ( If NWC is not returned, the cash   flow on year 3 will be less by $1000)

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