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You have been asked by president of your company to appraise 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 five-year class {MACRS rates as percentages:  20, 32, 19, 12, 11, 6}, and will be sold after two years for $40,000.

• Use of the truck will need a raise in net working capital (spare parts inventory) of $2,000. 

• The truck will have no effect on revenues; however it is anticipated to save the firm $20,000 per year in before-tax operating costs, mainly labor. 

• The firm’s marginal tax rate is 40%.

• The firm’s capital structure is 50% debt & 50% equity.  They evaluate their WACC to be 9.0% using the following inputs:  before-tax cost of debt-10% cost of equity-12%, expected market return-12%, risk-free rate-4%, and beta-1.0.

a)What is the net investment in truck project?  (That is, what is the Year 0 net cash flow?)
   
b)What is the operating cash flows in Year 1 & 2?
   
c)What is NPV of this project?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91616

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