Reference no: EM131648

You have been asked by the president of your company to determine 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 into the MACRS five-year class {MACRS rates as percentages: 20, 32, 19, 12, 11, 6}, and will be sold after two years for $40,000.
• Use of the truck will need an increase in net 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%.
• The firm's capital structure is 50% debt & 50% equity. They evaluate their WACC to be 9.0% using the subsequent inputs: before-tax cost of debt-10%, cost of equity-12%, expected market return-12%, risk-free rate-4%, beta-1.0.

a) What is the net investment in the truck project?

b) What is the operating cash flows in Year 1 & 2?

c) What is the NPV of this project?