You have been asked by the president of KMS Construction Company, headquartered in Muar, Johor, to evaluate
Question:
You have been asked by the president of KMS Construction Company, headquartered in Muar, Johor, to evaluate the proposed acquisition of a new earthmover. The mover's basic price is $50,000, and it will cost another $10,000 to modify it for special use by KMS Construction. Assume that the mover falls into the ACRS 3- sold after 3 years for $20,000, and it will require an increase in net working capital (spare parts inventory) of $2,000. The earth mover purchase will have no effect on revenues, but it is expected to save KMS $20,000 per year in before-tax operating costs, mainly labor. KMS's marginal tax rate is 40 percent.
a) What is the company's net investment if it acquires the earthmover?
b) What are the operating cash flows?
c)What are the additional (non-operating) cash flows?
d) If the project's cost of capital is 10 percent, should the earthmover be purchased?
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham