Question
Rader Railway 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.
Rader Railway 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 falls into the MACRS 3-year class, and ti would be sold after three years for $220,000. Using the setter requires a $22,000 increase in new working capital. Although it would have no effect on revenues, the setter would save the fir $185,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 14 percent. Submit all supporting calculations, including the Initial Investment Outlay, Annual Supplemental Operating Cash Flows, and the Terminal Cash Flow. Should the setter be purchased or not? Why or why not?
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