"A highway contractor is considering buying a new trench excavator that costs $222,000 and can dig...

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"A highway contractor is considering buying a new trenchexcavator that costs $222,000 and can dig a 3-foot-wide trench atthe rate of 15 feet per hour. The annual number of feet to dig eachyear is 5,300. The machine's production rate will remain constantfor the first 2 years of the operation and then decrease by 3 feetper hour for each additional year. The maintenance and operatingcosts will be $72 per hour. The contractor will depreciate theequipment with a five-year MACRS. At the end of 5 years, theexcavator can be sold for $84,000. The contractor will earn anadditional annual revenue of $112,000 with this new machine.Assuming the contractor's tax rate is 21% per year, determine thenet present worth of the cash flow from this machine. The company'sMARR is 14%."

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3.9 Ratings (510 Votes)

	0	1	2	3	4	5	6
MACRS %		20%	32%	19.20%	11.52%	11.52%	5.76%
No. of hours		353.3333	353.3333	441.6667	588.8889	883.3333
Investment	-222,000						12787.2
Salvage						84,000
Revenues		112,000	112,000	112,000	112,000	112,000
Costs		-25,440	-25,440	-31,800	-42,400	-63,600
Depreciation		-44,400	-71,040	-42,624	-25,574	-25,574
EBT		42,160	15,520	37,576	44,026	22,826
Tax (21%)		-8,854	-3,259	-7,891	-9,245	-4,793
Net Income		33,306	12,261	29,685	34,780	18,032
Cash Flows	-222,000	77,706	83,301	72,309	60,355	112,652
NPW	$53,309.98

No. of hours = 5,300 / Rate per hour

Costs = No. of hours x 72

Depreciation = Investment x MACRS %

Cash Flows = Investment + After-tax Salvage Value + Net Income + Depreciation

Net Present Worth can be calculated using NPV function on a calculator or excel or using TVM formulas with 14% discount rate.

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Transcribed Image Text

"A highway contractor is considering buying a new trenchexcavator that costs $222,000 and can dig a 3-foot-wide trench atthe rate of 15 feet per hour. The annual number of feet to dig eachyear is 5,300. The machine's production rate will remain constantfor the first 2 years of the operation and then decrease by 3 feetper hour for each additional year. The maintenance and operatingcosts will be $72 per hour. The contractor will depreciate theequipment with a five-year MACRS. At the end of 5 years, theexcavator can be sold for $84,000. The contractor will earn anadditional annual revenue of $112,000 with this new machine.Assuming the contractor's tax rate is 21% per year, determine thenet present worth of the cash flow from this machine. The company'sMARR is 14%."