You have been asked by the president of your company to evaluate the new propose
ID: 2708469 • Letter: Y
Question
You have been asked by the president of your company to evaluate the new proposed acquisition of a new special-purpose truck. Since you are not an expert on industrial vehicles, you hire a conuslting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of a model CP8 truck.The tuck's basic price is $40,000, and it will cost another $10,000 to modify it for special use by your firm. The truck will be depreciated using IRS guidelines that require depreciation expense equal to 33% of the initial depreciable value in year one, 45% of the inial depreciable value in year two, and 15% of the initial depreciable value in year three. The company expects to sell the new truck after three years for $20,000. Use of the truck will require an increase in the company's net working capital of $2,000, but this $2,000 may be recovered at the end of year three. The truck will have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40%. What is the initial outlay required to fund this project?
Explanation / Answer
Initial outlay :
Ignore consulation fee of $1500 as it has already been spent
basic price of $40,000
modification $10,000
working capital $2,000
Total = 52,000.
It is possible to work out the Net present Value of the truck with the information provided
To be a Net Present Value you also need to subtract money that went out (the money you invested or spent).
Add the Present Values you receive
Subtract the Present Values you pay
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