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You have been asked by the president of your company to evaluate the proposed acquisition of a...

Question:

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:

Let:

  • 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...

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
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