B5. (Cash Flows and NPV for a New Project) Syracuse Road building Company is considering the

B5. (Cash Flows and NPV for a New Project) Syracuse Road building Company is considering the

Corporate Financial Management (3rd Edition): Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set

B5. (Cash Flows and NPV for a New Project) Syracuse Road building Company is considering the purchase of a new tandem box dump truck. The truck costs $95,000, and an additional $5,000 is needed to paint it with the firm logo and install radio equipment. Assume the truck falls into the MACRS three-year class. The truck will generate no additional revenues, but it will reduce cash operating expenses by $35,000 per year. The truck will be sold for $40,000 after its five-year life. An inventory investment of $4,000 is required during the life of the investment. Syracuse Road building is in the 45% income tax bracket.

a. What is the net investment?

b. What is the after-tax net operating cash flow for each of the five years?

c. What is the after-tax salvage value?

d. Assuming a 10% cost of capital, what is the NPV of this investment? SOLUTION