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 $290,000. The truck falls into the MACRS 10-year class, and it will be sold after 10 years for $29,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,900. The truck will have no effect on revenues, but it is expected to save the firm $123,000 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 during year 2?

Explanation / Answer

depreciation in year 2 = 18%*290,000 =$52200

cash flows for this project be during year 2 = (123,000 -52200)*(1-35%) +52200 =$98220

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