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.

Problem 2 - Evaluating a Cost Saving Project Earnings Before Income Tax (EBIT) Free Cash Flow ?? ?? ?? ?? Required Rate of Return (WACC) ?? NPV ?? IRR