You have been by the president of your company to evaluate the proposed acquisit

Question

You have been by the president of your company to evaluate the proposed acquisition of a new special purpose truck. Since you are not an expert on industrial vehicles you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purpose of model CP8 truck. The trucks 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 guidlines that recquire the depretiation expense equal to 33% of the initial depreciable value in year 1, 45% of the initial depreciable value in year 2, and 15% of the initial depreciable value in year 3. The company expectsto sell the new truck after 3 years for $20,000. Use of the truck will recquire an increase in the company's net working capital of $2,000, but this $2,000 may be recovered at the end of year 3. The truck will have no effect on revenues, but is expected to save $25,000 per year in before tax operating cost, mainly labor the firm's marginal tax rate is 40%. What is the initial outlay recquired to fund this project?

A) $51,500

B) $52,000

C) $50,000

D) $53,500

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Outlay = 40000 (Purchase Price) + 10000 (Modification) + 2000 (Increase in Working Capital) = 52000

Option B is the correct answer.

Thanks.

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