Question: 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 $30,000 and it will cost another $10,000 to modify the truck for special use by your firm. The company spent $1200 analyzing the benefits of purchasing the truck.
The truck falls into the MARCS three year class life and it will be sold after three years for $15,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%.
the truck will have no effect on revenues, but it is expected to save the firm $15,000 per year in the before tax operating cost, mainly labor.
Your firms marginal income tax rate is 40% and cost of equity is 10%.
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 trucks book value at the end of year 3?
4. What is the terminal year cash flows at the end of the year3? )Be sure to include all operating and non operating cash flows)
5. Should the project be pursued? (Yes or No and state a reason or reasons)