The Wellington Construction Company is considering acquiring a new earthmover. The mover’s basic price is $90000. 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?