A new delivery truck can be purchased for $30,000. The old one could be sold day for $5,000, and has a book value of $3,000. In three years, the old truck will have a salvage value of $1,000 (and no book value). The new truck would be depreciated on a 5-year MACRS schedule. The firms tax rate is 21%.

Assume the remaining book value of the old truck will be depreciated in year 1, and that the new truck will have a salvage value of $10,000 in year 3.

a. What are the appropriate capital spending items to include in a capital budgeting analysis for the decision to purchase the new truck (assuming the old one would be sold to make room in the garage)?

b. What are the appropriate operating cash flows to consider for the first three years?

c. If the new truck will also save the firm $1,000 a year in gas expenses, what are the appropriate operating cash flows for the first three years?

d. Including the gas savings in part c, should the truck be purchased if the firms WACC is 15%? Why or why not?