You have been asked by the president of your company to evaluate the proposed ac
ID: 2759335 • Letter: Y
Question
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,900. Use of the truck will require an increase in NWC (spare parts inventory) of $2,900. The truck will have no effect on revenues, but it is expected to save the firm $20,300 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? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
FCF year 0
FCF year 1
FCF year 2
FCF year 3
Explanation / Answer
FCF year 0 = -62900
FCF year 1 = 20,194.30
FCF year 2 = 22,529.50
FCF year 3 = 34,346.20
Working
Accumulated Depreciation = 19998 + 26670 + 8886 = 55,554
Book Value at the end = 60000-55554 = 4446
Post Tax salavage value = Salvage Value -Tax rate*(Salvage Value-Book Value at the end )
Post Tax salavage value = 20900-35%*(20900-4446)
Post Tax salavage value = 15141.10
Working Year 0 Year1 Year2 Year3 Before-tax operating costs Saving [a] 20300 20300 20300 Accelerated Depreciation Rate [b] 33.33% 44.45% 14.81% Initial Investment in Truck [c] -60000 Annual Depreciation [d = b*60000] 19,998.00 26,670.00 8,886.00 Net Income before tax [e = a - d] 302.00 (6,370.00) 11,414.00 Tax Expenses [f= e*35%] 105.70 (2,229.50) 3,994.90 Net Income [g = e-f] 196.30 (4,140.50) 7,419.10 Annual Operating Cash Flow [h = g+d] 20,194.30 22,529.50 16,305.10 Post Tax salavage value [i] 15,141.10 Investment in NWC [j] -2900 2,900.00 Total Cash Flow [k= c+h+i+j] -62900 20,194.30 22,529.50 34,346.20Related Questions
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