2. You have been asked by the president of your company to evaluate the proposed acquisition of a new excavator for the firm's construction & mining division. The excavator's base price is $170,000, and it would cost another $36,000 to modify it for special use by your firm. The excavator, which falls into the MACRS 3-year class, would be sold after 3 years for $72,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $10,000. The excavator would have no effect on revenues, but is expected to save the firm 861,000 per year in before-tax operating costs, mainly labor. The firm's marginal (federal plus state) tax rate is 26 percent. a. What is the net investment of the excavator? b. What are the net operating cash flows in years 1, 2 and 3? c. What is the additional, non-operating, terminal cash flow in year 3? Nous d. If the project's cost of capital is 11 percent, should the excavator be purchased? c. If the project's cost of capital is 10 percent, should the excavator be purchased? NPV10n. To see if to accept Proposal 10,ooo INVE 216,000 It+3 68660 Boso 9 et operating (I Give, A Depi = 206,000 (3333) = s Depa = 206,000 4 Y45) 91567 = 206,000 t. 1881) A Depa NCF, = Co--61,000) (1-026)+(-20)68660 = 62992 E cf, a co 64,000 ) (76) rode (91567) 6=68747 45190 1.21130507) + TCF NCF3=53072 TLF vabe of Much,ze achize = 72,000