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 3-year class, and it will be sold after three years for $20,000. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. 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. A- Refer to New Truck. What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)A) -$50,000B) -$52,600C) -$55,800D) -$62,000E) -$65,000B- Refer to New Truck. What is the operating cash flow in Year 1?A) $17,820B) $18,254C) $19,920D) $20,121E) $21,737C- Refer to New Truck. What is the total value of the terminal year non-operating cash flows at the end of Year 3?A) $10,000B) $12,000C) $15,680D) $16,000E) $18,000D) Refer to New Truck. The truck's cost of capital is 10 percent. What is its NPV?A) -$1,547B) -$562C) -$0D) $562E) $1,034
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