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

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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.

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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 ...

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