1. You have been asked by the president of Ellis Construction Company, headquartered in Toledo, to...

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1. You have been asked by the president of Ellis ConstructionCompany, headquartered in Toledo, to evaluate the proposedacquisition of a new earthmover. The mover’s basic price is$65,000, and it will cost another $14,000 to modify it for specialuse by Ellis Construction. Assume that the earthmover falls intothe MACRS 3-year class. (See Table 10A.2 at the end of Chapter 10for MACRS recovery allowance percentages.) It will be sold afterthree years for $26,000, and it will require an increase in networking capital (spare parts inventory) of $2,900. The earthmoverpurchase will have no effect on revenues, but it is expected tosave Ellis $27,500 per year in before-tax operating costs, mainlylabor. Ellis’s marginal tax rate is 35 percent. A) What is thecompany’s net initial investment outlay if it acquires theearthmover? (That is, what is the Year 0 net cash flow?) B). Whatare the incremental operating cash flows in Years 1, 2, and 3? C).What is the terminal cash flow in Year 3? D). If the project’srequired rate of return is 10 percent, should the earthmover bepurchased? Use NPV, IRR, and MIRR to answer this question. E).Calculate the traditional payback period and the discounted paybackperiod for this project.

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3.9 Ratings (429 Votes)

Year 0 1 2 3 basic price 65000 cost of modification 14000 Investment in Inventory 2900 Annual operating savings 27500 27500 27500 less annual depreciation 263307 351155 116999 net operating savings 11693 76155 158001 less tax 35 409255 2665425 5530035 after tax savings 760045 4950075 10270065 add depreciation 263307 351155 116999 Incremental operating cash flow 2709075 30165425 21969965 recovery of working capital 2900 after tax sale proceeds 19598865 net See Answer

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1. You have been asked by the president of Ellis ConstructionCompany, headquartered in Toledo, to evaluate the proposedacquisition of a new earthmover. The mover’s basic price is$65,000, and it will cost another $14,000 to modify it for specialuse by Ellis Construction. Assume that the earthmover falls intothe MACRS 3-year class. (See Table 10A.2 at the end of Chapter 10for MACRS recovery allowance percentages.) It will be sold afterthree years for $26,000, and it will require an increase in networking capital (spare parts inventory) of $2,900. The earthmoverpurchase will have no effect on revenues, but it is expected tosave Ellis $27,500 per year in before-tax operating costs, mainlylabor. Ellis’s marginal tax rate is 35 percent. A) What is thecompany’s net initial investment outlay if it acquires theearthmover? (That is, what is the Year 0 net cash flow?) B). Whatare the incremental operating cash flows in Years 1, 2, and 3? C).What is the terminal cash flow in Year 3? D). If the project’srequired rate of return is 10 percent, should the earthmover bepurchased? Use NPV, IRR, and MIRR to answer this question. E).Calculate the traditional payback period and the discounted paybackperiod for this project.