The Bailey Construction Company is considering the purchase of a diesel power shovel to improve its productivity. The shovel, which costs $80,000, is expected to produce a before-tax benefit of $36,000 in the first year and $4,000 less in each succeeding year for a total of five years (i.e., before-tax benefit of $32,000 in the second year, $28,000 in the third year, continuing to $20,000 in the fifth year). The salvage value of the equipment will be $5,000 at the end of five years. 

The firm uses the sum-of-years-digit depreciation for the equipment and has an annual tax rate of 34 percent. If the MARR after tax is 10 percent, is the purchase worthwhile?

Answer rating: 100% (QA)

Solutions Step 1 To determine whether the purchase of the diesel power shovel is worthwhile we need ... View the full answer