You are buying a new truck in order to grow your local moving service. The new t

Question

You are buying a new truck in order to grow your local moving service. The new truck costs $37,000. You will need to spend another $6,000 on hitches, ramps, and other special equipment for this use. You will use this truck for 4 years and then you plan that the salvage value will be $8,000. The new truck should increase revenue by 40% over last year's $85,000 revenue. As a result of the truck purchase, operating expenses will increase by $11,000. The depreciation expense will increase by $2500. Your marginal tax rate is 35%. What is the NET incremental cash flow for year 1? (answers are provided in $)

Explanation / Answer

Incremental Revenues = 40% x 85,000 = 34,000

Inc. expense = 11,000

Depreciation = 2,500

EBT = 34,000 - 11,000 - 2,500 = 20,500

Tax = 20,500 x 35% = 7,175

Net Income = 20,500 - 7,175 = 13,325

Incremental cash flows = Inc. Net Income + Inc. Depreciation = 13,325 + 2,500 = 15,825

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