Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new tractor using excel. (all calculations must be shown) • The tractor’s basic price is $50,000, and it will cost another $9,000 to modify it for special use by your firm. • The tractor falls into the MACRS five-year class {MACRS rates as percentages: 20, 32, 19, 12, 11, 6}, and will be sold after two years for $35,000. • Use of the tractor will require an increase in net working capital (spare parts inventory) of $1,500. • The tractor will have no effect on revenues, but it is expected to save the firm $21,000 per year in before-tax operating costs, mainly labor. • The firm’s marginal tax rate is 35%. • The firm’s capital structure is 50% debt & 50% equity. They calculate their WACC to be 9.25% using the following inputs: before-tax cost of debt-10%, cost of equity-12%, expected market return-12%, risk-free rate-4%, beta-1.0. a) What is the net investment in the tractor project? (That is, what is the Year 0 net cash flow?) b) What is the operating cash flows in Year 1 & 2 (show all calculations using excel)? c) What is the NPV of this project (show all calculations using excel)?

Answer 1