Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have been asked by the president of your company to evaluate the proposed acquisition of a new specialpurpose truck. The truck's basic price is

You have been asked by the president of your company to evaluate the proposed acquisition of a new specialpurpose 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 three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating 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 percent.

a. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)

b.. What is the operating cash flow in Year 1?

c. What is the total terminal (non-operating) cash flow at the end of Year 3?

d. The truck's cost of capital is 10 percent. What is its NPV?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance

Authors: Laurence S. Seidman

1st Edition

0073375748, 978-0073375748

More Books

Students also viewed these Finance questions

Question

Does it exceed two pages in length?

Answered: 1 week ago

Question

Does it avoid typos and grammatical errors?

Answered: 1 week ago