Rader Railway is determining whether to purchase a new rail setter, which has a base price of $421,000 and would cost another $49,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $214,000. Using the setter requires a $20,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $179,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 15 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter be purchased because the net present value, that is $ , is zero.
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $421,000 and would cost another $49,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $214,000. Using the setter requires a $20,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $179,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 15 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter be purchased because the net present value, that is $ , is zero.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $421,000 and would cost another $49,000 to install. The setter will be
The setter be purchased because the net present value , that is $ , is zero.
Transcribed Image Text:Table 10A.2 Recovery Allowance Percentages for
MACRS Asset Classes
Ownership
Year
1
2
3
4
5
6
7
8
9
10
11
3-Year
33%
45
15
7
Classes of Investments
7-Year
100%
5-Year
20%
32
19
12
11
6
100%
14%
25
17
13
9
9
4
10-Year
10%
18
14
12
9
7
100%
Notes: These recovery allowance percentages were taken from
the Internal Revenue Service website, https://www.irs.gov.The
percentages are based on the 200 percent declining-balance
method prescribed by MACRS, with a switch to straight-line
depreciation at some point in the asset's life. For example,
consider the 5-year class recovery allowance percentages. The
straight-line percentage would be 20 percent per year, so the
200 percent declining-balance multiplier is 2.0 (20%) = 40% = 0.4.
Because the half-year convention applies (see discussion), the
MACRS percentage for Year 1 is 20 percent. For Year 2, 80 per-
cent of the depreciable basis remains to be depreciated, so the
recovery allowance percentage is 0.40 (80%) = 32%. The same
procedure is followed for subsequent years. Although the tax
tables carry the allowance percentages to two decimal places,
we have rounded the numbers for ease of illustration.
7
7
7
6
3
100%
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