Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Hi I am confused on all of this, can someone help me as much as possible and explain their thought process. thank you Capital Budgeting
Hi I am confused on all of this, can someone help me as much as possible and explain their thought process. thank you
Capital Budgeting Problem You have been asked by the president of your company to evaluate the proposed acquisition of a new truck. The truck's basic price is $62,000, and it will cost another $3,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, with depreciation rates of 33 percent, 45 percent, 15 percent and 7 percent, and it will be sold after three years for $25,000. Use of the truck will require an immediate increase in net operating working capital (spare parts inventory) of $2,000. The truck would increase the firm's before-tax revenues by $27,000 per year but would also increase operating costs (excluding depreciation) by $6,000 per year. The firm's marginal tax rate is 40 percent and the relevant cost of capital is 12%. Assume that the company has other profitable projects so that any operating losses on this project will be used to offset taxable operating income on other projects. You must develop a full solution (in spreadsheet format) to this problem before answering the questions A) What is the net investment in the truck at t 0? B) What is the operating cash flow in Year 1? C) What is the total terminal (salvage, non-operating) cash flow at the end of Year 3? D) What is the NPV f this potential investment? E) What is the IRR of the potential investment? F) Should this investment be undertaken? WhyStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started