President


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You have been asked by the President of your company to evaluatethe proposed acquisition of a new special- purpose truck. Thetruck’s basic price is $50,000, and it will cost another $10,000 tomodify it for special use by your firm. The truck falls in theMACRS 5-year class (20,32,19,12,11,6), and it will be sold afterTWO years for $20,000. Use of the truck will require an increase innet operating working capital (spare parts inventory) of $2,000.The truck will have no effect on revenues, but it is expected tosave the firm $20,000 per year in before-tax operating costs,mainly labor. The firm’s marginal tax rate is 40 percent.The Firm’scapital structure is 50% debt, and 50% equity. They calculate theirWACC to be 9.0% using the following imputs: before tax cost of debt10%, cost of equity 12%, expected rate of return 12%, risk freerate 4% and beta 1.0.

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