You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck with the following additional facts:
The trucks basic price is $50,000 and it will cost another $10,000 to modify the truck for special use by your firm.
The truck falls into the MARCS five year class life (applicable annual percentages are 20%, 32%, 19%, 12%, 11%, and 6%) and the truck will be sold after two years for $40,000.
Use of the truck requires an increase in net working capital by your company of $2,000 (spare parts and inventory)
The truck will have no effect on your company's revenues but is expected to save the firm $20,000 per year in before tax operating costs, mainly labor costs.
Your firms marginal income tax rate is 40%
Your firms capital structure is 50% debt and 50% equity. The firm calculates its WACC to be 9% using the following inputs: before tax cost of debt of 10%, cost of quity of 12%, an expected market return of 12%, a risk free rate of 4.0%, and a firm beta of 1.0.
1. What is the net investment in the truck project (that is what is the Year 0 net cash flow)?
2. What are the operating cash flows in Year 1 and Year 2 resulting from the project?
3. What is the NPV of this project?
4. Should the project be pursued? (Yes or No and state a reason or reasons)