Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $19,800. Use of the truck will require an increase in NWC (spare parts inventory) of $1,800. The truck will have no effect on revenues, but it is expected to save the firm $20,400 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent. What will the cash flows for this project be for years 0,1,2, and 3? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Answer 1

Cashflows
			YEar0	YEar1	YEar2	Year3
Initial investment			-60000
Investment in Wc			-1800
After tax savings				13464	13464	13464
(20400-34%)
Taxshield on Dep				6799.32	9067.8	3021.24
(Annual dep * 34%)				(60000*33.33%*34%)	(60000*44.45%*34%)	(60000*14.81%*34%)
Release of WC						1800
After tax salvage						14579.64
Cashflows of each year			-61800	20263.32	22531.8	32864.88
Note:
After tax salvage":
Sales value				19800
Book value (60000*7.41%)			4446
Gain on sale (19800-4446)			15354
Tax on Gain @34%				5220.36
After tax salvage":				14579.64