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NPV: Evaluate the proposed acquisition of a new special-purpose 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 into the MACRS five-year class {MACRS rates as percentages: 20, 32, 19, 12, 11, 6}, and will be sold after two years for $40,000.

Use of the truck will require an increase in net 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%.

The firm's capital structure is 50% debt & 50% equity. They calculate their WACC to be 9.0% using the following inputs: before-tax cost of debt-10%, cost of equity-12%, expected market return-12%, risk-free rate-4%, beta-1.0.

a) What is the net investment in the truck project? (That is, what is the Year 0 net cash flow?)
b) What is the operating cash flows in Year 1 & 2?
c) What is the NPV of this project?

Solution Preview

See attached Excel file.

a) Net investment in the truck project

Basic price $50,000
Cost of modification $10,000
Increase in net working capital $2,000
Net investment in the truck project $62,000

b) Operating cash flows

Year 1 Year ...

Solution Summary

This solution provides calculations for net investment, operating cash flows, and NPV of the project in both plain text and formatted with formulas in the attached Excel file.