Assignment CFM- Capital Budgeting

Schick Construction is considering the purchase a new tandem box dump truck. The truck cost $
95,000, and an additional $ 5,000 in needed to paint it with the firm logo and install radio
equipment. Assume the truck fall into the MACRS three-year class. The truck will generate no
additional revenues, but it will reduce cash operating expenses by $ 35,000 per year. The truck
will sold for $ 40,000 after its five-year life. An inventory investment of $ 4,000 is requiring
during the life of the investment. Schick is in the 45% income tax bracket.

a. What is the net investment or initial cash flow?

b. What is after tax net operating cash flow for each of the five years?
c. What is the after-tax salvage value?
d. Assuming a 10% cost of capital, what is the NPV of this investment?

Answer:
X
What is the net investment or initial cash flow?
a.
Cost Buying Truck
Purchased Cost $ 95.000
Additional cost $ 5.000
Total cost of machine $ 100.000
Cost Selling Truck
Selling cost $ 4.000
Tax (45%) $ -2.250
Total after tax proceeds $ 1.750
Initial Investment $ 101.750

b. What is after tax net operating cash flow for each of the five years?
CFAT= (revenue-expense)(1-tax)+tax(depreciation)
CFAT Year 1 = (0-35.000)(1-0,45)+0,45(0.20 x95.000) $ 27.800
CFAT Year 2 = (0-35.000)(1-0,45)+0,45(0.32 x95.000) $ 32.930
CFAT Year 3 = (0-35.000)(1-0,45)+0,45(0.19 x95.000) $ 27.372,5
CFAT Year 4 = (0-35.000)(1-0,45)+0,45(0.12 x95.000) $ 24.380
CFAT Year 5 = (0-35.000)(1-0,45)+0,45(0.12 x95.000) $ 24.380

c. What is the after-tax salvage value?

salvage value $ 40.000
tax rate $ 18.000
salvage value after tax $ 22.000
d. Assuming a 10% cost of capital, what is the NPV of this investment?
Initial Investment $ 100.000
Cash flow year 1 $ 27.800
Cash flow year 2 $ 32.930
Cash flow year 3 $ 27.372,5
Cash flow year 4 $ 24.380
Cash flow year 5 $ 24.380
Rate 10%
NPV $ 4.843