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 terminal (non-operating) cash flow at the end of Year 3?

Question

Quizplus · Accepted Answer

The terminal cash flow includes the after-tax salvage value and the recovery of net working capital. The after-tax salvage value is calculated as the sale price minus taxes on the gain (R20,000 - (R20,000 - book value) * 40%). The book value is calculated using MACRS depreciation. Add the recovered net working capital of R2,000 to this amount to get the terminal cash flow.

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