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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 $50,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,100. Use of the truck will require an increase in NWC (spare parts inventory) of $2,100. The truck will have no effect on revenues, but it is expected to save the firm $17,000 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? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Solutions

Expert Solution

Solution :-

Book value after 3 Years = $50,000 - [ $16,665 + $22,225 + $7,405 ] = $3,705

Salvage Value after 3 years = $20,100

Now Gain on sale = $20,100 - $3,705 = $16,395

Tax on Gain on Sale = $16,395 * 21% = $3,442.95

Now After tax Salvage Value = $20,100 - $3,442.95 = $16,657.05

Therefore Cash flows

Year 0 :- - $52,100.00

Year 1 :- $16,929.65

Year 2 :- $18,097.25

Year 3 :- $33,742.10

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jeff jeffy answered 1 year ago
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