Question
ABC Company is determining whether to purchase a new rail setter, which has a base price of $432,000 and would cost another $52,000 to install.
ABC Company is determining whether to purchase a new rail setter, which has a base price of $432,000 and would cost another $52,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $220,000. Using the setter requires a $22,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $185,000 per year in before-tax operating costs (excluding depreciation). The marginal tax rate is 40 percent, and its required rate of return is 16 percent. Should the setter be purchased? (NPV)
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