# 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

https://brainmass.com/business/capital-budgeting/capital-budgeting-proposed-acquisition-of-a-new-truck-22284

#### 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

Answer:D) -$62,000

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

Answer: C) $19,920

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

Saving= $20,000

Decrease ...

#### 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.