Reference no: EM133184706
Question - Buckeyes Farms is considering purchasing multiple tractors for a total purchase price of $540,000
The tractors are depreciated using MACRS for a three-year asset; they will be sold after three years for $60,000
Use of the tractors will require an increase in net operating working capital (small parts inventory) of $10,000 at the time of purchase
The increase in net operating working capital will be "recovered" at the end of year 3
The tractors will increase EBITDA by $250,000 each year over the next three years
Two years ago the company spent $5,000 to investigate which tractors to buy
Interest expense is $3,000 per year
The company's marginal tax rate is 35% per year
Cost of Capital = 13%
MACRS depreciation percentages:
year 0=0
year 1= 33.33%
2= 44.45%
3= 14.81%
4= 7.41%
a. What is the net investment in the tractors? (that is, what is the Year 0 net cash flow)
b. What is the operating cash flow in year 1?
c. What is the terminal (non-operating) cash flow at the end of year 3?
d. The tractors' cost of capital is 13%, what is its Net Present Value?
e. Calculate the IRR (Internal Rate of Return) of the Tractors.