In: Finance
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.)
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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