You have been asked by the president of your company to evaluate the proposed ac
ID: 2774264 • 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
Year 0
Year 1
Year 2
Year 3
Purchase of Truck
-60000
Increase in Net Working Capital
-2600
Salvage Value
20600
Pre-tax Savings in Operating Costs = A
20200
20200
20200
Tax rate (%)
34
34
34
Total Post Tax Savings A*(1-Tax)
13332
13332
13332
Depreciation at MACRS rate
19998
26670
8886
Free Cash Flows
33330
40002
22218
Total Cash flows for the project
-62600
33330
40002
42818
working
Cost of the Special Purpose Truck = $ 60,000
MACRS Depreciation rates - Year 1 – 33.33%, Year 2 – 44.45%, Year 3 – 14.81%
Depreciation Amount
Year 1 = 60000 * 33.33% = 19998
Year 2 = 60000 * 44.45% = 26670
Year 3 = 60000 * 14.81% = 8886
Increase in Net Working Capital = $ 2,600
Savings in Pre-Tax operating costs = $20,200
Marginal Tax Rate = 34%
Year 0
Year 1
Year 2
Year 3
Purchase of Truck
-60000
Increase in Net Working Capital
-2600
Salvage Value
20600
Pre-tax Savings in Operating Costs = A
20200
20200
20200
Tax rate (%)
34
34
34
Total Post Tax Savings A*(1-Tax)
13332
13332
13332
Depreciation at MACRS rate
19998
26670
8886
Free Cash Flows
33330
40002
22218
Total Cash flows for the project
-62600
33330
40002
42818
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