You Have Been Asked by the President of Your Company

question 67

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 40 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: −$52,500; Year 1 Cash flow: $18,666; Year 2 Cash flow: $20,890; Year 3 Cash flow: $30,944
• 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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