You have been asked by the president of your company to evaluate 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 three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating 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 percent.
-What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)

Question

Quizplus · Accepted Answer

The net investment in the truck includes the purchase price ($50,000), modification costs ($10,000), and the increase in net operating working capital ($2,000), totaling $62,000.

You Have Been Asked by the President of Your Company