Problem:
Evaluating the proposed purchase of a truck for your company...
The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your company. The truck falls in the MACRS 3-year class, and it will be sold after three years for $20,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. 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%.
Question 1. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)
Question 2. What is the operating cash flow in Year 1?
Question 3. What is the total value of the terminal year non-operating cash flows at the end of Year 3?
Question 4. The truck's cost of capital is 10%. What is its NPV?