Reference no: EM133184706

Question - Buckeyes Farms is considering purchasing multiple tractors for a total purchase price of $540,000

The tractors are depreciated using MACRS for a three-year asset; they will be sold after three years for $60,000

Use of the tractors will require an increase in net operating working capital (small parts inventory) of $10,000 at the time of purchase

The increase in net operating working capital will be "recovered" at the end of year 3

The tractors will increase EBITDA by $250,000 each year over the next three years

Two years ago the company spent $5,000 to investigate which tractors to buy

Interest expense is $3,000 per year

The company's marginal tax rate is 35% per year

Cost of Capital = 13%

MACRS depreciation percentages:

year 0=0

year 1= 33.33%

2= 44.45%

3= 14.81%

4= 7.41%

a. What is the net investment in the tractors? (that is, what is the Year 0 net cash flow)

b. What is the operating cash flow in year 1?

c. What is the terminal (non-operating) cash flow at the end of year 3?

d. The tractors' cost of capital is 13%, what is its Net Present Value?

e. Calculate the IRR (Internal Rate of Return) of the Tractors.