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MACRS table required You have been asked by the president of your company to evaluate the...

  1. MACRS table required You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the trick will require an increase in net working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. The truck's cost of capital is 10%. What is its NPV?

    -$1,547

    -$562

    $0

    $562

    $1,034

Solutions

Expert Solution

Time line 0 1 2 3
Cost of new machine -60000
Initial working capital -2000
=Initial Investment outlay -62000
3 years MACR rate 33.00% 45.00% 15.00% 7.00%
Savings 20000 20000 20000
-Depreciation =Cost of machine*MACR% -19800 -27000 -9000 4200
=Pretax cash flows 200 -7000 11000
-taxes =(Pretax cash flows)*(1-tax) 120 -4200 6600
+Depreciation 19800 27000 9000
=after tax operating cash flow 19920 22800 15600
reversal of working capital 2000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 12000
+Tax shield on salvage book value =Salvage value * tax rate 1680
=Terminal year after tax cash flows 15680
Total Cash flow for the period -62000 19920 22800 31280
Discount factor= (1+discount rate)^corresponding period 1 1.1 1.21 1.331
Discounted CF= Cashflow/discount factor -62000 18109.09091 18842.9752 23501.127
NPV= Sum of discounted CF= -1546.806912

jeff jeffy answered 2 years ago
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