You Have Been Asked by the President of Your Company

question 84

Multiple Choice

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in NWC (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 21 percent. What will the free cash flows for this project be?

• A) Year 0 Cash flow: −$50,000; Year 1 Cash flow: $18,666; Year 2 Cash flow: $20,890; Year 3 Cash flow: $28,444
• B) Year 0 Cash flow: −$50,000; Year 1 Cash flow: $18,666; Year 2 Cash flow: $21,890; Year 3 Cash flow: $28,444
• C) Year 0 Cash flow: −$52,000; Year 1 Cash flow: $19,300; Year 2 Cash flow: $20,467; Year 3 Cash flow: $35,933
• D) Year 0 Cash flow: −$52,500; Year 1 Cash flow: $18,666; Year 2 Cash flow: $22,890; Year 3 Cash flow: $30,944

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Definitions:

Income Elasticity

A gauge of the extent to which the consumption of a good or service is affected by alterations in the income levels of consumers.

Inferior Good

A type of good for which demand decreases when consumer income rises, contrary to normal goods where demand increases with rising income.

Excise Tax

A specific tax levied on particular goods or services at the point of manufacture or sale, often included in the price of the product.

Supply Curve

A graphical representation of the relationship between the price of a good or service and the quantity of it that producers are willing to supply.