# Capital Budgeting-proposed acquisition of a new truck

Not what you're looking for?

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

##### Purchase this Solution

##### 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

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 ...

##### Purchase this Solution

##### Free BrainMass Quizzes

##### Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

##### 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.

##### Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

##### Motivation

This tests some key elements of major motivation theories.

##### Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.