Question
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The trucks basic price is
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The trucks 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 firms marginal tax rate is 40%. The firms 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. What is the net investment in the truck project? (That is, what is the Year 0 net cash flow?) What is the operating cash flows in Year 1 & 2? Please show work if possible.
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