Solve all problems in the Excel file provided

Problem 2

You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The mover's basic price is $220,000, and it would cost another $30,000 to modify it for special use. Assume that the mover falls into the MACRS 5-year class, it would be sold after 4 years for $60,000, and it would require an increase in net operating working capital (spare parts inventory) of $10,000. The earth mover would have no effect on revenues, but it is expected to save the firm $52,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 22 percent and the project's cost of capital is 8 percent. Evaluate the project using the NPV rule and the IRR rule.

Excel file

N13 A B C D E F G 64 Problem 2 - Evaluating a Cost Saving Project 65 66 Year 0 Year 1 Year 2 Year 3 Year 4 67 Acquisition - 5 Year Life 68 Earth Mover ?? 69 Installation Costs ?? 70 Total Initial Investment $ 71 72 Savings in Costs ? ? ?? ?? 73 Depreciation Rate (5 Year) ?? ?? ?? ?? 75 Total Depreciation Costs ?? ?? ?? ?? 76 77 Earnings Before Income Tax (EBIT) ?? ?? ?? ?? 78 79 Tax Rate ?? ?? ?? ?? 80 Total Taxes ?? ?? ?? 81 82 Net Operating Profits (NOPAT) ?? ?? ?? ?? 83 84 Add Back Depreciation ?? ?? 85 Operating Cash Flow ?? ?? ?? ?? 86N13 X v fx A B C D E F G 87 Net Operating Working Capital ?? ?? ?? ?? ?? 88 Increase in NOWC ?? ? ? ? ? ?? ?? 89 90 Total Annual Project Cash Flow ?? ?? 22 ?? 91 92 Terminal Year Cash Flow 93 Machine Sale ?? 94 Less: Book Value of Machine ?? 95 Profit on Sale ?? 96 Tax on Profit (22%) ?? 97 Net Salvage Value on Equipment ?? 98 99 100 Free Cash Flow ?? ?? ?? ?? ?? 101 102 Required Rate of Return (WACC) ?? 103 104 NPV ?? 105 106 IRR ?? 107