You have been asked by the president of your company to evaluate the proposed ac
ID: 2774205 • 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 $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,600. Use of the truck will require an increase in NWC (spare parts inventory) of $2,600. The truck will have no effect on revenues, but it is expected to save the firm $20,200 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 $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,600. Use of the truck will require an increase in NWC (spare parts inventory) of $2,600. The truck will have no effect on revenues, but it is expected to save the firm $20,200 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent.
Explanation / Answer
Marginal tax rate 34% Time line 0 1 2 3 Cost of new vans -60000 -NWC -2600 =Initial Investment outlay -62600 Savings 20200 20200 20200 MACR depreciation rate 33.33% 44% 14.81% -Depreciation =Purchase cost of 5 vans * MACR %age 19998 26670 8886 = 40198 46870 29086 -taxes =(savings- depreciation)*(1-tax) 26530.68 30934.2 19196.76 +Depreciation -19998 -26670 -8886 =after tax operating cash flow 6532.68 4264.2 10310.76 Terminal cash flow Reversal of NWC 2600 Cash inflow due to sale 20600 =Taxes adjusted for book value =(selling price - book value )*taxes -5492.36 Terminal year after tax non operating cash flow = 17707.64 Total Cash flow for the period -62600 6532.68 4264.2 28018.4 Note: remaining book value = pruchase price - accumulated depreciation over 3 years
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