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# Proposed purchase of a truck

I'm getting ready to start a Finance class. I'm reading ahead in the book to try and prepare myself for the course. I have a 4.0 GPA and really want to maintain it through graduation; however, this finance book seems like it is pretty daunting! I'm trying to understand these finance concepts and there are a few problems that I would like to have someone solve so that I know if I'm doing it right. I'm also trying to learn how to use my financial calculator so if the problem results could show not only how to solve the problem but also contain the financial calculator steps involved, I would greatly appreciate it! Here are the problems:

Evaluating the proposed purchase of a truck for your company...

The truck's basic price is \$50,000, and it will cost another \$10,000 to modify it for special use by your company. 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%, 45%, 15%, and 7%. 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%.

1. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)

2. What is the operating cash flow in Year 1?

3. What is the total value of the terminal year non-operating cash flows at the end of Year 3?

4. The truck's cost of capital is 10%. What is its NPV?

#### Solution Preview

1. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)

The year 0 cash flow is the total cash spent in starting the project. The initial investment is
Basic Price of truck \$50,000
Modification 10,000
Increase in net working capital 2,000
Total investment is \$62,000

2. What is the operating cash flow in Year 1?

The operating cash flows are the cash flows once the project is running
1. There is a savings of \$20,000 ...

#### Solution Summary

The solution explains how to evaluate a proposed purchase of a truck by calculating the operating cash flows and the NPV of the project

\$2.19