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 $19,800. Use of the truck will require an increase in NWC (spare parts inventory) of $1,800. The truck will have no effect on revenues, but it is expected to save the firm $20,400 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Year 0 1 2 3
FCF $ $ $ $

NCF year 0 = -$61,800

NCF year 1 = $20,264

NCF year 2 = $22,613.40

NCF year 3 = $32,782.60

Explanation:

initial outlay = $60,000 + $1,800 = $61,800

depreciation expense per year:

year 1 = $60,000 x 33.33% = $20,000

year 2 = $60,000 x 44.85% = $26,910

year 3 = $60,000 x 14.81% = $8,886      residual value = $4,204

after tax salvage value = $19,800 - [($19,800 - $4,204) x 34%] = $14,497.36

cost savings per year = $20,400

net cash flow year 1 = [($20,400 - $20,000) x (1 - 34%)] + $20,000 = $20,264

net cash flow year 2 = [($20,400 - $26,910) x (1 - 34%)] + $26,910 = $22,613.40

net cash flow year 3 = [($20,400 - $8,886) x (1 - 34%)] + $8,886 + $14,497.36 + $1,800 = $32,782.60

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