Question
You are evaluating the proposed acquisition of a new crane. Its basic price is $150,000 and will cost another $30,000 to modify for use by
You are evaluating the proposed acquisition of a new crane. Its basic price is $150,000 and will cost another $30,000 to modify for use by your firm. It falls into the MACRS 3 depreciation class, with applicable rates of 33%, 45%, 15% and 7% annually. Your company plans to sell it after 3 years for $6,000 per year. The equipment is not expected to increase revenues directly but is expected to save the company $30,000 per year in before-tax costs. The firm's tax rate is 40%.
What is the company's net investment if it acquires the crane?
What is the operating cash flows for years 1, 2 and 3?
What is the terminal cash flow?
If the project cost of capital is 10%, should the crane be purchased? (10 marks)
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