Peachtree Construction Company, a highway contractor, is considering the purchase of a new trench excavator that costs $300,000 and can dig a 3‐foot‐wide trench at the rate of 16 feet per hour. The contractor gets paid according to the usage of the equipment, $100 per hour. The expected average annual usage is 500 hours, and maintenance and operating costs will be $10 per hour. The contractor will depreciate the equipment by using a five‐year MACRS, units-of-production method. At the end of five years, the excavator will be sold for $100,000.
(a) Assuming that the contractor’s marginal tax rate is 35% per year, determine the annual after‐tax cash flow.
(b) Is this a good investment if the contractor requires 15% return on investment?