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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 $410,000. The truck falls into the MACRS 3-year class, and it will be sold after 3 years for $66,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,600. The truck will have no effect on revenues, but it is expected to save the firm $120,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be during year 3?

  • $136,667

  • $155,521

  • $46,830

  • $107,551

Solutions

Expert Solution

Depriciation = 14.81%*410000 = $60,721

Tax on sale of Asset = (66,000-(410000*7.41%))*21%

= 30,381*21%

= 6,380

Net Sales proceed from Asset = 66000-6380

= 59,620

Operating Cashflow calculation :-

Profit before tax = 120000-60,621 = 59,379

Net Income = 59,379*(1-21%) = 46,909

Operating Cashflow= 46,909+60,721 = 107,630

Total Cashflow = 107,630+59,620+6,600 = 155,521

jeff jeffy answered 2 years ago
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