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 5-year class (20,32,19,12,11,6), and it will be sold after TWO years for $20,000. 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.The Firm's capital structure is 50% debt, and 50% equity. They calculate their WACC to be 9.o% using the following imputs: before tax cost of debt 10%, cost of equity 12%, expected rate of return 12%, risk free rate 4% and beta 1.0.
A- Refer to New Truck. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)
B- What are the operating cash flows in Years 1 and 2
C- Show calculations of cost of capital
D- What is the NPV of this project? BY this measure is the project acceptable.
A- Refer to New Truck. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)
B- What are the operating cash flows in Years 1 and 2
C- Show calculations of cost of capital
D- What is the NPV of this project? BY this measure is the project acceptable.
