You have been asked by the president of Ellis Construction Company, headquartered in Toledo, to evaluate the proposed acquisition of a new earthmover. The moverâs basic price is $50,000, and it will cost another $10,000 to modify it for special use by Ellis Construction. Assume that the earthmover falls into the MACRS 3-year class. (See Table 10A.2 at the end of Chapter 10 for MACRS recovery allowance percentages.) It will be sold after three years for $20,000, and it will require an increase in net working capital (spare parts inventory) of $2,000. The earthmover purchase will have no effect on revenues, but it is expected to save Elli $20,000 per year in before-tax operating costs, mainly labor. Ellisâs marginal tax rate is 40 percent.
a. What is the companyâs net initial investment outlay if it acquires the earthmover? (That is,
what is the Year 0 net cash flow?)
b. What are the incremental operating cash flows in Years 1, 2, and 3?
c. What is the terminal cash flow in Year 3?
d. If the projectâs required rate of return is 10 percent, should the earthmover be purchased?
You have been asked by the president of Ellis Construction Company, headquartered in Toledo, to evaluate the proposed acquisition of a new earthmover. The moverâs basic price is $50,000, and it will cost another $10,000 to modify it for special use by Ellis Construction. Assume that the earthmover falls into the MACRS 3-year class. (See Table 10A.2 at the end of Chapter 10 for MACRS recovery allowance percentages.) It will be sold after three years for $20,000, and it will require an increase in net working capital (spare parts inventory) of $2,000. The earthmover purchase will have no effect on revenues, but it is expected to save Elli $20,000 per year in before-tax operating costs, mainly labor. Ellisâs marginal tax rate is 40 percent.
a. What is the companyâs net initial investment outlay if it acquires the earthmover? (That is,
what is the Year 0 net cash flow?)
b. What are the incremental operating cash flows in Years 1, 2, and 3?
c. What is the terminal cash flow in Year 3?
d. If the projectâs required rate of return is 10 percent, should the earthmover be purchased?
Related questions
New-Project Analysis
The president of the company you work for has asked you to evaluate the proposed acquisition of a new piece of equipment for the firmâs R&D department The equipment's basic price is $100,000, and it would cost another $15,000 to modify it for special use by your firm. The equipment, which falls into the MACRS 3-year class, would be sold after 3 years for $45,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $6,000. The machine would have no effect on revenues, but it is expected to save the firm $30,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 30%.
A) What is the Year-0 net cash flow? If the answer is negative, use minus sign.
B) What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
C) What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.
D) If the project's cost of capital is 14%, should the chromatograph be purchased?
