finance Data Bank: What is the net investment in the truck

Subject: Business    / Finance
Question

[MACRS table required]

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 $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 40 percent.

.doc#_edn1″ title=””>[i]. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)

a. -$50,000

b. -$52,600

c. -$55,800

d. -$62,000

e. -$65,000

.doc#_edn2″ title=””>[ii]. What is the operating cash flow in Year 1?

a. $17,820

b. $18,254

c. $19,920

d. $20,121

e. $21,737

.doc#_edn3″ title=””>[iii]. What is the total terminal (non-operating) cash flow at the end of Year 3?

a. $10,000

b. $12,000

c. $15,680

d. $16,000

e. $18,000

.doc#_edn4″ title=””>[iv]. The truck’s cost of capital is 10 percent. What is its NPV?

a. -$1,547

b. -$ 562

c. $ 0

d. $ 562

e. $1,034

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