You have been asked by the president of your Company to evaluate the proposed acquisition of a new earth mover. The movers basic price is $50,000, and it would cost another $10,000 to modify it for special use. Assume that the mover falls into the MACRS 5-year class that it would be sold after 5 years for $20,000, and that it would require an increase in net working capital (spare parts inventory) of $2,000 at the start of the project. This working capital will be recovered at Year 5. The earth mover would have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The machine can be sold for $15,000 at the end of 5 years. The firms marginal federal-plus-state tax rate is 21%.

If the projects cost of capital is 10%, should the earth mover be purchased or not and why?

Briefly discuss the importance of cash flow analysis to a company.