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 $19,700. Use of the truck will require an increase in NWC (spare parts inventory) of $1,700. The truck will have no effect on revenues, but it is expected to save the firm $17,000 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?

Explanation / Answer

Solution : year cost saving DEP. `PBT TAX 34% PAT DEP. OPERATING C/F NWC INVESTMENT TOTAL C/F 0 -2400 -50000 -52400 1 17000 16500 500 170 330 16500 16830 16830 2 17000 22500 -5500 -1870 -3630 22500 18870 18870 3 17000 7500 9500 3230 6270 7500 13770 2400 14030 30200 Total benefit 13500 Note 1 DEPERICIATION CHART for MARCS 3 year class: Cost 50000 year rate DEP. 1 0.33 16500 2 0.45 22500 3 0.15 7500 Total 46500 WDV at end of year 3 is 50000 - 46500 = 3500 Note 2 Asset cost 50000 Less: Depreciatioon charged 46500 WDV of machine at the time of sale 3500 Sale value of machine 19700 Profit on sale 16200 Less: Tax on sale@35% 5670 After tax cash flows from sale of asset 14030

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