You have been asked by the president of your company to evaluate the proposed acquisition of...

You have been asked by the president of your company to evaluate the proposed acquisition of a new special purpose truck for $50000. The truck falls into the MACRS 3 year class,and it will be sold after three years for $19400. Use of the truck will require an increase in NWC (spare parts inventory) of $1400. The truck will have no effect on revenues but it is expected to save the firm $17100 per year in before tax operating costs,mainly labor. The firms marginal tax rate is 34 percent. What will the cash flows for this project be?

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Expert Solution

Initial Investment = $50,000
Useful Life = 3 years

Depreciation Year 1 = 33.33% * $50,000
Depreciation Year 1 = $16,665

Depreciation Year 2 = 44.45% * $50,000
Depreciation Year 2 = $22,225

Depreciation Year 3 = 14.81% * $50,000
Depreciation Year 3 = $7,405

Book Value at the end of Year 3 = $50,000 - $16,665 - $22,225 - $7,405
Book Value at the end of Year 3 = $3,705

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $19,400 - ($19,400 - $3,705) * 0.34
After-tax Salvage Value = $14,063.70

Initial Investment in NWC = $1,400

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$50,000 - $1,400
Net Cash Flows = -$51,400

Year 1:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $17,100 * (1 - 0.34) + 0.34 * $16,665
Operating Cash Flow = $16,952.10

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $16,952.10

Year 2:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $17,100 * (1 - 0.34) + 0.34 * $22,225
Operating Cash Flow = $18,842.50

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $18,842.50

Year 3:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $17,100 * (1 - 0.34) + 0.34 * $7,405
Operating Cash Flow = $13,803.70

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $13,803.70 + $1,400 + $14,063.70
Net Cash Flows = $29,267.40

jeff jeffy answered 7 months ago

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