The Wellington Construction Company is considering acquiring a new earthmover. The mover’sbasic price is $90,000, and it will cost another$18,000 to modify it for special use by the company.This earthmover falls into the MACRS five-yearclass. It will be sold after four years for $30,000. Thepurchase of the earthmover will have no effect onrevenues, but it is expected to save the firm $35,000per year in before-tax operating costs, mainly labor.The firm’s marginal tax rate (federal plus state) is40%, and its MARR is 10%.(a) Is this project acceptable, based on the mostlikely estimates given?(b) Suppose that the project will require an increasein net working capital (spare-parts inventory) of$5,000, which will be recovered at the end ofyear 4. Taking this new requirement into account,would the project still be acceptable?(c) If the firm’s MARR is increased to 18% and withthe working capital requirement from (b) not ineffect, what would be the required savings inlabor so that the project remains profitable?
The Wellington Construction Company is considering acquiring a new earthmover. The mover’s
basic price is $90,000, and it will cost another
$18,000 to modify it for special use by the company.
This earthmover falls into the MACRS five-year
class. It will be sold after four years for $30,000. The
purchase of the earthmover will have no effect on
revenues, but it is expected to save the firm $35,000
per year in before-tax operating costs, mainly labor.
The firm’s marginal tax rate (federal plus state) is
40%, and its MARR is 10%.
(a) Is this project acceptable, based on the most
likely estimates given?
(b) Suppose that the project will require an increase
in net working capital (spare-parts inventory) of
$5,000, which will be recovered at the end of
year 4. Taking this new requirement into account,
would the project still be acceptable?
(c) If the firm’s MARR is increased to 18% and with
the working capital requirement from (b) not in
effect, what would be the required savings in
labor so that the project remains profitable?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 6 images
