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 $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,900. Use of the truck will require an increase in NWC (spare parts inventory) of $2,900. The truck will have no effect on revenues, but it is expected to save the firm $20,300 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?

Explanation / Answer

Cash flows :

Year 0 = - Truck Cost - NWC

Year 0 = - 60000 - 2900

Year 0 = -62900

Year 1 = expected to save in before-tax operating costs *(1-tax rate) + Deprecition*tax rate

Year 1 = 20300*(1-35%) + 60000*33.33%*35%

Year 1 = $ 20,194.30

Year 2 = expected to save in before-tax operating costs *(1-tax rate) + Deprecition*tax rate

Year 2 = 20300*(1-35%) + 60000*44.45%*35%

Year 2 = $ 22,529.50

Year 3 = expected to save in before-tax operating costs *(1-tax rate) + Deprecition*tax rate + Post tax salvage value

Year 3 = 20300*(1-35%) + 60000*14.81%*35% + (20900- 35%*(20900- 60000*7.41%))

Year 3 = $ 31446.20

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