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    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

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    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.

    $2.19

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