### Project Evaluation: Special-Purpose Truck Acquisition**Context:**You have been tasked with evaluating the proposed acquisition of a new special-purpose truck worth $70,000. The truck falls under the MACRS 3-year class, is not eligible for bonus depreciation or Section 179 expensing, and is planned to be sold after three years for $19,000. It requires an increase in Net Working Capital (spare parts inventory) of $1,000. The truck will not affect revenues but is expected to save $24,000 per year in operating costs (mainly labor). The firm's marginal tax rate is 21%.**Cash Flow Analysis:**The table below summarizes the Free Cash Flows (FCF) for this project over a three-year period. Note that negative amounts should be indicated by a minus sign, and all answers are rounded to two decimal places.| Year | 0 | 1 | 2 | 3 ||------|-------------|----------|----------|----------|| FCF | $71,000.00 | $23,859.51 | $25,494.15 | $40,137.07 |**Explanation:**- **Year 0:** The initial cost of the truck is an outflow of $71,000.- **Year 1-2:** Represents the FCF generated from the operating cost savings, adjusted for taxes.- **Year 3:** Includes both the operational savings and the salvage value minus tax effects.**Graph/Diagram Description:**There is no graphical representation in this image. The focus is on a tabular display of cash flows associated with the truck acquisition project.**Notes:**- The answer provided is flagged as complete but not entirely correct, indicating potential calculation or rounding errors.

Terminal value is calculated by adding the salvage value after-tax and the working capital recovered.Year 0 Year 0 cash out flow = Truck Cost & The increase in NWC Year 0 cash flow = -$70000 - $1000 Year 0 cash flow = -$71000 Year 1 Year 1 cash flow = (Saving before tax * (1 - tax rate)) + (Depreciation * tax rate) Year 1 cash flow = $24,000 * (1 - 21%) + $70,000 * 33.33% * 21% Year 1 cash flow = $18,960 + $4,899.51 = $23,859.51 Year 2 Year 2 cash Flow = (Saving before tax * (1 - tax rate)) + (Depreciation * tax rate) Year 2 cash Flow = $24,000 * (1 - 21%) + $70,000 * 44.45% * 21% Year 2 cash Flow = $18,960 + $6,534.15 = $25,494.15 Year 3 Terminal Value = Salvage value after tax + Working capital recovered Terminal Value = ($19,000 - 21% * ($19,000 - $70,000 * (1 - (33.33% + 44.45% + 14.81%)))) + $1,000 Terminal Value = $17,099.27 Year 3 cash flow = (Saving before tax * (1 - tax rate)) + (Depreciation * tax rate) + Terminal value Year 3 cash flow = $24,000 * (1 - 21%) + $70,000 * 14.81% * 21% + $17,099.27 Year 3 cash flow = $18,960 + $2,177.07 + $17,099.27 = $38,236.34

Business

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You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $19,000. Use of the truck will require an increase in NWC (spare parts inventory) of $1,000. The truck will have no effect on revenues, but it is expected to save the firm $24,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) O Answer is complete but not entirely correct. Year 1 FCF 71,000.00 X S 23,859.51 O $ 25,494.15 $ 40,137.07

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $19,000. Use of the truck will require an increase in NWC (spare parts inventory) of $1,000. The truck will have no effect on revenues, but it is expected to save the firm $24,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) O Answer is complete but not entirely correct. Year 1 FCF 71,000.00 X S 23,859.51 O $ 25,494.15 $ 40,137.07

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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