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 a five-year depreciation class and will be depreciated to zero over the five-year period. The truck is actually expected to be sold for $20,000 after three years when the project is ended. Use of the truck will require an increase in net working capital of $2,000 (spare parts). The truck will have no effect on revenue, but it is expected to save the firm $22,000 per year in before-tax operating costs, mainly labor. The firms marginal tax rate is 40 percent and the required rate of return on the project is 13 percent. What should you do?
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