You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $230,000. The truck falls into the MACRS 5-year class, and it will be sold after 5 years for $23,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,300. The truck will have no effect on revenues, but it is expected to save the firm $101,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 35 percent.
What will the cash flows for this project be during year 2?
Modified Accelerated Cost Recovery System:
The five-year modified accelerated cost recovery system (MACRS) prescribes depreciation allowances of 20, 32, 19.2, 11.52, 11.52, and 5.76 percent for the years 1-6 respectively.
Answer and Explanation:
- OCF = operating cash flow
- T = tax rate
- D = depreciation
According to MACRS, in Year 2, D = 230,000 * 20% = $46,000.
The cash flows in year...
See full answer below.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Finance 101: Principles of FinanceChapter 10 / Lesson 4