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

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Finance

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 $50,000, and it will cost another $10,000 to modify it for special use by Ellis Construction. Assume that the mover falls into the MACRS 3-year class. It will be sold after 3 years for $20,000, and it will require an increase in working capital (spare parts inventory) of $2,000. The earthmover purchase will have no effect on revenues, but it is expected to save Ellis $20,000 per year in before-tax operating costs, mainly labor. Elliss marginal federal-plus-state tax rate is 40%. The cost of capital (discount rate) is 10%. Use the following 3-yeear MACRS schedule: 0.3333, 0.4445, 0.1481, and 0.0741.

1. Compute the NPV of the project.

2. Compute the IRR of the project.

3. What is your conclusion?

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