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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 $420,000. The truck falls into the MACRS 5-year class, and it will be sold after 5 years for $67,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,700. The truck will have no effect on revenues, but it is expected to save the firm $121,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 30 percent.

What will the cash flows for this project be during year 3?

a. $108,892

b. $28,252

c. $84,000

d. $165,340

Cash Flows:

Cash flow is the money that is moving either in and out of a business. Cash flow occurs either when cash is coming in from customers or clients who are buying products or services or cash is going out of the business in the form of payments for expenses like rent.

Answer and Explanation: 1

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Option a.

The formula for calculating operating cash flows is given by

Operating Cash Flow = EBIT (1 - Taxes) + Depreciation * Tax Rate

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What Is Cash Flow? - Definition, Calculation & Example

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Chapter 8 / Lesson 14
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Learn about types of cash flow. Study the cash flow definition in business, discover cash flow examples, and examine how to use the total cash flow formulae.


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