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 $180,000. The truck falls into the MACRS 3-year class, and it will be sold after 3 years for $18,000. Use of the truck will require an increase in NWC (spare parts inventory) of $4,800. The truck will have no effect on revenues, but it is expected to save the firm $85,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 30 percent. What will the cash flows for this project be during year 2?

$139,510

$83,503

$80,200

$4,990

Explanation / Answer

cash flows for second year is

firm savings per year before tax is = $ 85,000

firm savings per year after tax is = $ 85,000*(1-0.30)

= $ 59,500

depreciation on truck per second year as per macrs table = $ 180,000*44.45%=$ 80,010

tax savings on depreciation= $ 80,010*30%= $ 24,003

total operating cash flow for second year is= $ 59,500+$ 24,003= $ 83,503

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