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 $19,500. Use of the truck will require an increase in NWC (spare parts inventory) of $1,500. The truck will have no effect on revenues, but it is expected to save the firm $20,500 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? (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 $19,500. Use of the truck will require an increase in NWC (spare parts inventory) of $1,500. The truck will have no effect on revenues, but it is expected to save the firm $20,500 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 35 percent.

Explanation / Answer

0 1 2 3 4 Savings in before tax operating costs 20500 20500 20500 Depreciation 19998 26670 8886 4446 Incremental net operating income 502 -6170 11614 Tax at 35% 176 -2160 4065 Incremental NOPAT 326 -4011 7549 Add: Depreciation 19998 26670 8886 OCF 20324 22660 16435 Capital spending 60000 -14231 See note below. Change in NWC 1500 -1500 FCF -61500 20324 22660 32166 Note: Salvage value 19500 Book value 4446 Gain on sale 15054 Tax on gain at 35% 5269 Net salvage value = 19500-5269 = 14231

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