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 $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 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.
-Refer to Exhibit 10-1.The truck's required rate of return is 10 percent.What is its NPV?
A)−$1,547
B)−$562
C)$0
D)$562
E)$1,034

Question

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The Answer of 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 $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 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.
-Refer to Exhibit 10-1.The truck's required rate of return is 10 percent.What is its NPV?
A)−$1,547
B)−$562
C)$0
D)$562
E)$1,034

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