Question

1. a. Young Brains is considering expanding its current operations by adding new trucks to its fleet. The company expects to increase revenues with this asset expansion project. The firm plans to depreciate the trucks over a 6-year economic life using MACRS and to sell the trucks after 6 years. The firm’s marginal tax rate is 34%. The following are estimates of the project’s incremental cash flows: The purchase price of the trucks is ₵495,000. Delivery cost of ₵5,000 will be incurred. The initial investment required in net operating working capital will total ₵25,000. Revenues of ₵300,000 in year 1, ₵350,000 in years 2 and 3, and ₵375,000 in years 4 through 6 are expected. The following rates will be used to depreciate the trucks from years 1 through 6 respectively: 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%. Operating expenses, excluding depreciation amount to 40% of cash revenues. Salvage value of ₵100,000 is expected in year six. i. Calculate the initial, annual operating, and terminal cash flows associated with the trucks. ii. Use the NPV evaluation technique to determine if the trucks should be purchased using a 14% cost of capital.

Answer 1