Question

In: Finance

Best Snow Removal (BSR) inc. would like to buy a new truck for $80,000. It is...

Best Snow Removal (BSR) inc. would like to buy a new truck for $80,000. It is expected that the truck will generate a pre-tax NET revenue of $30,000 per year. The economic life of the truck is 5 years and it belongs to UCC class 10 (30% CCA). The initial NWC INCREASES by $4,000 and it INCREASES by an ADDITIONAL $2,000 at the BEGINNING of year 3 (i.e. at time t = 2). BSR plans to sell the truck at the end of its economic life for $20,000. XYZ owns a fleet of trucks but does NOT expect to buy any new trucks in the year this truck will be sold. (To be precise, it will be sold at the BEGINNING of year 6 after it completes its 5-year life.) The XYZ’s cost of capital is 10% and its tax rate is 40%

A. Find the PV of the BFS’s after-tax NET revenues to the NEAREST dollar ( not using excel), please give full explanation please.

B. To the NEAREST dollar, find the PV of the effect of NWC addition and release from year t = 1 through year t = 5 (inclusive) on your cash flow.

Solutions

Expert Solution

A) PV of after tax net revenues = $ 49939

B) PV of NWC is $ -1927


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