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 $70,000 , the truck fall into the MACES 3 year class and will be sold after 3 years for $19,900 use of the truck will require a increse in NWC (spare parts inventory) of $1900 , the truck will have no effect on revenues, but is expected to save the firm $23,700 per year in before tax operating costs. the firmmarginal tax rate is 35 percent. What will be the cash flows for the project?

Solutions

Expert Solution

initial investment in truck
cost of truck		-70000
investment in working capital		-1900
cash outflow at year 0		-71900

Year	annual savings	less depreciation	after depreciation savings	less tax 35%	after tax savings	add depreciation	annual saving after tax before depreciation
0							-71900
1	23700	23331	369	129.15	239.85	23331	23570.85
2	23700	31115	-7415	-2595.25	-4819.75	31115	26295.25
3	23700	10367	13333	4666.55	8666.45	10367	29369.35

cash flow in year 3	(8666.45+10367)+10335.9	29369.35

cost of machine	Macrs rate	cost of machine*Macrs rate
70000	33.33%	23331
70000	44.45%	31115
70000	14.81%	10367

accumulated depreciation		64813

selling price of machine		19900
book value of machine at end of year 3	70000-64813	5187
gain on sale of machine		14713
less tax on gain on sale of machine	14714*(1-.35)	9564.1
after tax sale proceeds from sale of machine	19900-9564.1	10335.9

jeff jeffy answered 1 year ago

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