Capital Budgeting
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1. 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 $60,000. The truck falls into the four year class using straight line depreciation method, and it will be sold after four years for $0. The use of this new truck will bring revenue of $25,000 annually, and will have annual maintenance expense of $5,000. The firm's marginal tax rate is 40 percent and the required rate of return is 10%.
1a. What is the initial investment?
1b. What is the Cash Flow at year 1?
1c. What is the Cash Flow at year 4?
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2. Lotus Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The firm's cost of capital is 12%. The after tax cash flows, including depreciation, for the truck and the pulley are as follows:
Year Truck Pulley
0 -50,000 -70,000
1 10,000 15,000
2 10,000 15,000
3 10,000 15,000
4 10,000 15,000
5 10,000 15,000
6 10,000 15,000
7 10,000 15,000
2a. What is the payback period for the truck?
2b. What is the payback period for the pulley?
2c. What is NPV for the truck?
2d. What is NPV for the pulley?
2e. What is IRR for the truck?
2f. What is IRR for the pulley?
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Solution Summary
The solution explains how to calculate the initial investment, cash flows, NPV, IRR and MIRR of the projects.
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