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?)
B- Refer to New Truck. What is the operating cash flow in Year 1?
C- Refer to New Truck. What is the total value of the terminal year non-operating cash flows at the end of Year 3?
D) Refer to New Truck. The truck's cost of capital is 10 percent. What is its NPV?
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.