1. You have been asked by the president of Ellis Construction Company, headquartered in Toledo, to evaluate the proposed acquisition of a new earthmover. The movers basic price is $750,000, and it will cost another $100,000 to modify it for special use by Ellis Construction. The mover falls into the MACRS 5-year class. It will be sold after 5 years for $200,000, and it will require an increase in working capital (spare parts inventory) of $50,000, which will be recovered in full at the end of the projects life. The earthmover purchase will have no effect on revenues, but it is expected to save Ellis $420,000 per year in before-tax operating costs. Elliss marginal tax rate is 30%. The cost of capital (discount rate) is 11%. Use the following 5-year MACRS schedule: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%.

Compute the NPV and IRR of the project. Would you ask the president to buy the equipment?