A construction company is considering the proposed acquisition of a new earth mover. The purchase price is
Question:
A construction company is considering the proposed acquisition of a new earth mover. The purchase price is $100,000, and an additional $25,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS five‐year classification (tax life), and it will be sold after five years (project life) for $50,000. Purchase of the earthmover will have no effect on revenues, but it is expected to save the firm $60,000 per year in before‐tax operating costs—mainly labor. The firm’s marginal tax rate is 40%. Assume that the initial investment is to be financed by a bank loan at an interest rate of 10% payable annually. Determine the after‐tax cash flows and the worth of investment for this project if the firm’s MARR is known to be 12%.
MARRMinimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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