Question
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
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?
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?) a) What is the operating cash flows in Year 1 & 2? c) What is the NPV of this projectStep by Step Solution
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