you have been asked by the president of Farr construction company to evaluate the proposed acquisition of a new earth mover. the mover's basic price is $50,00 and it will cost another $10,000 to modify it for special use. assuming that the mover fall into the MACRS 3 years class, it will be sold after 3year for $20,000 and it will require an increase in net working capital (spare part inventory) of $2,000. the earth mover will have no effect on revenue, but it is expected to save the firm $20,000 per year in before tax operating cost, mainly labor. the firm marginal federal plus state tax rate is 40%.

a) what is the net cost of earth mover?( that is, what are the year o cash flows)

b) what are the operating cash flow Year 1,2 and 3?

c) what are the additional (nonoperating) cash flow in Year 3?

d) if the project's cost of capital is 10%, should the earth mover be purchased?

Answer rating: 100% (QA)

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