Purchase Solution

# Capital Budgeting-proposed acquisition of a new truck

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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.

##### Solution Preview

See the attached file where formatting is conserved

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

Cost of truck= \$50,000

Modification cost= \$10,000

Increase in working capital= \$2,000

Year 0 net cash flow= -\$62,000 =-(50000+10000+2000)

(since the cash flow is an out flow it is negative)

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

Depreciation= \$19,800 =33%*(50000+10000)

Saving= \$20,000

Decrease ...

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