1. You have been asked by the president of Ellis Construction Company, headquartered in Toledo,...
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1. 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 $65,000, and it will cost another $14,000 to modify it for special use by Ellis Construction. Assume that the earthmover falls into the MACRS 3-year class. (See Table 10A.2 at the end of Chapter 10 for MACRS recovery allowance percentages.) It will be sold after three years for $26,000, and it will require an increase in net working capital (spare parts inventory) of $2,900. The earthmover purchase will have no effect on revenues, but it is expected to save Ellis $27,500 per year in before-tax operating costs, mainly labor. Elliss marginal tax rate is 35 percent. A) What is the companys net initial investment outlay if it acquires the earthmover? (That is, what is the Year 0 net cash flow?) B). What are the incremental operating cash flows in Years 1, 2, and 3? C). What is the terminal cash flow in Year 3? D). If the projects required rate of return is 10 percent, should the earthmover be purchased? Use NPV, IRR, and MIRR to answer this question. E). Calculate the traditional payback period and the discounted payback period for this project.
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