Please help You have been asked by the president of your company to evaluate the
ID: 2707213 • Letter: P
Question
Please help
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $19,200. Use of the truck will require an increase in NWC (spare parts inventory) of $1,200. The truck will have no effect on revenues, but it is expected to save the firm $20,600 per year in before-tax operating costs, mainly labor. The firm
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $19,200. Use of the truck will require an increase in NWC (spare parts inventory) of $1,200. The truck will have no effect on revenues, but it is expected to save the firm $20,600 per year in before-tax operating costs, mainly labor. The firm
Explanation / Answer
Year 0 1 2 3 Revenue $ - $ 20,600 $ 20,600 $ 20,600 Depreciation $ - $ (19,998) $ (26,670) $ (8,886) Other Costs $ - $ - $ - $ - "NOPAT" $ - $ 367 $ (3,703) $ 7,146 Add Depreciation $ - $ 19,998 $ 26,670 $ 8,886 Cash Flow from Operations $ - $ 20,365 $ 22,967 $ 16,032 Cost of Asset $ (60,000) Installation $ - Net Working Capital $ (1,200) $ 1,200 Sale of Equipment $ 19,200 Book Value of Equipment $ 4,446 Profit from Sale $ 14,754 Tax on Sale $ (5,754) Total Cash Flow $ (61,200.00) $ 20,365.22 $ 22,967.30 $ 30,677.48