Purchase Solution

Calculating Operating Cash Flow - Capital Budgeting

Not what you're looking for?

Ask Custom Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck.

The truckââ?¬â?¢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 into the MACRS five-year class {MACRS rates as percentages: 20, 32, 19, 12, 11, 6}, and will be sold after two years for $40,000.

Use of the truck will require an increase in net 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 firmââ?¬â?¢s marginal tax rate is 40%.

The firmââ?¬â?¢s capital structure is 50% debt & 50% equity. They calculate their WACC to be 9.0% using the following inputs: before-tax cost of debt-10%, cost of equity-12%, expected market return-12%, risk-free rate-4%, beta-1.0.

A.) What is the net investment in the truck project? (That is, what is the Year 0 net cash flow?)
b.) What is the operating cash flows in Year 1 & 2?
c) What is the NPV of this project?

Purchase this Solution

Solution Summary

In depth explanation of the steps necessary to determine the initial cash outflow required for a long-term project. USe of capital budgeting techniques to determine whether the project is viable

Purchase this Solution


Free BrainMass Quizzes
Basics of corporate finance

These questions will test you on your knowledge of finance.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)