Problem:
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 in the MACRS 3-year class, and it will be sold after three years for $20,000. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. 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.
1) Refer to New Truck. 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
2) Refer to New Truck. What is the operating cash flow in Year 1?
A) $17,820
B) $18,254
C) $19,920
D) $20,121
E) $21,737
3) Refer to New Truck. What is the total value of the terminal year non-operating cash flows at the end of Year 3?
A) $10,000
B) $12,000
C) $15,680
D) $16,000
E) $18,000
4) Refer to New Truck. 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