Landover Construction Companys most recent revenue was $4,124,000 with operating costs (exclusive of depreciation) of...
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Landover Construction Companys most recent revenue was $4,124,000 with operating costs (exclusive of depreciation) of $1,176,300, depreciation expense of $245,000, and interest expense of $30,000. Landovers tax rate is 35%. Both revenues and costs for next year are expected to rise each year by 5 percent with depreciation and interest expense to remain approximately the same. The Companys president has asked you to evaluate the proposed acquisition of a new earth mover. The movers base price is $50,493.92 and it would cost another $10,000 to modify it for special use. If acquired, the earth mover would be deprecated using the straight-line method over its economic life of 3 years and then be sold for $15,000. An initial increase in spare parts inventory of $2,190.15 would also be required. The earth mover would have no effect on revenues, but it is expected to save Landover $20,000 per year in operating costs, mainly labor. Landovers cost of capital is 7.13 percent.
If Landover decides to proceed with the acquisition, answer the following:
What is the proper cash flow amount to use as the initial investment? Show your computations.
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