Exhibit 10-1
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 R50,000, and it will cost another R10,000 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 R20,000.Use of the truck will require an increase in net working capital (spare parts inventory) of R2,000.The truck will have no effect on revenues, but it is expected to save the firm R20,000 per year in before-tax operating costs, mainly labor.The firm's marginal tax rate is 40 percent.
[MACRS table required]
-Refer to Exhibit 10-1.What is the incremental operating cash flow in Year 1?

Question

Quizplus · Accepted Answer

The incremental operating cash flow in Year 1 is calculated as follows: Savings from operating costs (R20,000) minus taxes on savings (R20,000 * 40% = R8,000) plus depreciation tax shield. The depreciation for Year 1 using MACRS for a 3-year property is 33.33% of the truck's cost (R60,000), which is R19,998. The tax shield is R19,998 * 40% = R7,999.2. Therefore, the cash flow is R20,000 - R8,000 + R7,999.2 = R19,999.2, which rounds to R19,920.

Exhibit 10-1 You Have Been Asked by the President of Your Company