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%. For capital budgeting purposes, what is the net cost of the truck?

a) $8,000

b) $6,000

c) $43,000

d) $37,000

Explanation / Answer

Net Cost of truck in year 0 = New truck cost + Other expenses = 37,000 + 6,000 = 43,000

Hence, c is the correct answer.

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