Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $380,000. The truck falls into the MACRS 5-year class, and it will be sold after 5 years for $63,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,300. The truck will have no effect on revenues, but it is expected to save the firm $101,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 35 percent. What will the cash flows for this project be during year 3?

Answer 1

Step 1 - Calculation of Depreciation for the year 3

Year	Rate of Depreciation	Depreciation
1	20.00%	76,000
2	32.00%	121,600
3	19.20%	72,960
4	11.52%	43,776
5	11.52%	43,776

Step 2 - Cash flow for the year 3

Particulars	Cash Flow
Saving in operating cost	101000
less Depreciation	72960
Before Tax Saving	28040
Less Tax @35%	9814
After Tax Saving	18226
Add Depreciation	72960
Cash flow for year 3	91186

Cash flow for the project during year 3 = 91186