Explore BrainMass

Explore BrainMass

    NPV: Evaluate the proposed acquisition of a new special-purpose truck.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 4, 2020, 2:02 am ad1c9bdddf

    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.