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 $60,000. The truck will be fully depreciated to 0 using straight line depreciation and it will be sold after three years for $20,000. Use of the truck 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 $19,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What is the initial investment outlay for the truck? (That is, what is the Year 0 net cash flow?) What is the incremental operating cash flow in Year 1? What is the terminal (nonoperating) cash flow at the end of Year 3? The truck's required rate of return is 10 percent. What is its NPV?
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 $60,000. The truck will be fully depreciated to 0 using straight line depreciation and it will be sold after three years for $20,000. Use of the truck 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 $19,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent.
What is the initial investment outlay for the truck? (That is, what is the Year 0 net cash flow?)
What is the incremental operating cash flow in Year 1?
What is the terminal (nonoperating) cash flow at the end of Year 3?
The truck's required rate of return is 10 percent. What is its NPV?
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