Question
Problem 2 You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The
Problem 2 You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The movers basic price is $220,000, and it would cost another $30,000 to modify it for special use. Assume that the mover falls into the MACRS 5-year class, it would be sold after 4 years for $60,000, and it would require an increase in net operating working capital (spare parts inventory) of $10,000. The earth mover would have no effect on revenues, but it is expected to save the firm $52,000 per year in before-tax operating costs, mainly labor. The firms marginal federal-plus-state tax rate is 25 percent and the projects cost of capital is 10 percent. Evaluate the project using the NPV rule and the IRR rule.
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Problem 2 - Evaluating a Cost Saving Project \begin{tabular}{cccccc} & Year 0 & Year 1 & Year 2 & Year 3 & Year 4 \\ \cline { 2 - 2 } Acquisition - 5 Year Life & & & & \\ Earth Mover & ?? \\ Installation Costs & & & & \\ Total Initial Investment & & & & & \\ \$ & & & & \end{tabular} Savings in Costs \begin{tabular}{lccc} ?? & ?? & ?? & ?? \\ ?? & ?? & ?? & ?? \\ \hline?? & ?? & ?? & ?? \\ \hline?? & ?? & ?? & ?? \\ \hline & ?? & ?? & ?? \\ \hline? & ?? & ?? & ?? \\ \hline?? & ?? & ?? \\ \hline & ?? & ? & ? \\ \hline \end{tabular} Depreciation Rate (5 Year) Total Depreciation Costs Earnings Before Income Tax (EBIT) Net Operating Profits (NOPAT) Add Back Depreciation Operating Cash Flow \begin{tabular}{llll} ?? & ?? & ?? & ?? \\ \hline?? & ?? & ?? & ?? \\ \hline \end{tabular} Net Operating Working Capital ?? Increase in NOWC?? ? ? ???? Total Annual Project Cash Flow ?? ?? ?? ?? Terminal Year Cash Flow Machine Sale Less: Book Value of Machine Profit on Sale Tax on Profit (25\%) Net Salvage Value on Equipment Free Cash Flow \begin{tabular}{lllll} \hline?? & ?? & ?? & ?? \\ \hline \end{tabular} Required Rate of Return (WACC) ?? NPV ?? IRRStep by Step Solution
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