Capital Budgeting-proposed acquisition of a new truck

You have been asked by the President of your company to evaluate the proposed acquisition of a new special- purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls in the MACRS 3-year class, and it will be sold after three years for $20,000. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. Use of the truck will require an increase in net operating working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent.

A- Refer to New Truck. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)
A) -$50,000
B) -$52,600
C) -$55,800
D) -$62,000
E) -$65,000

B- Refer to New Truck. What is the operating cash flow in Year 1?
A) $17,820
B) $18,254
C) $19,920
D) $20,121
E) $21,737

C- Refer to New Truck. What is the total value of the terminal year non-operating cash flows at the end of Year 3?
A) $10,000
B) $12,000
C) $15,680
D) $16,000
E) $18,000

D) Refer to New Truck. The truck's cost of capital is 10 percent. What is its NPV?
A) -$1,547
B) -$562
C) -$0
D) $562
E) $1,034

Solution Summary

The Capital Budgeting problem -proposed acquisition of a new special- purpose truck- is answered. Net investment in the truck, operating cash flow in Year 1, terminal year non-operating cash flows and NPV are calculated.