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 $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $21,000. Use of the truck will require an increase in NWC (spare parts inventory) of $3,000. The truck will have no effect on revenues, but it is expected to save the firm $16,900 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 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.)

Explanation / Answer

Particulars Year0 Year1 Year2 Year3 Total Purchase of truck          (50,000.00) Investment in Working Capital            (3,000.00) Savings net of Tax = 16,900*.66            11,154.00            11,154.00            11,154.00 Tax Savings on depreciation = Dep*.34               5,666.10               7,556.50               2,517.70 Release of working capital               3,000.00 Salvage Value              15,119.70 Net Cash Flows          (53,000.00)            16,820.10            18,710.50            31,791.40                 14,322.00 Depreciation Rates 33.33% 44.45% 14.81% Depreciation            16,665.00            22,225.00               7,405.00                 46,295.00 Cost of Truck            50,000.00 Accumulated Dep            46,295.00 Book Value at end of 3 Years               3,705.00 Salvage Value            21,000.00 Capital Gain            17,295.00 Tax on Gain = 17,295*.34               5,880.30 Salvage Value net of tax = 21000-5880.30            15,119.70

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