The Wellington Construction Company is considering acquiring a new earthmover. The mover’sbasic price is $90,000, and it will cost another$18,000 to modify it for special use by the company.This earthmover falls into the MACRS five-yearclass. It will be sold after four years for $30,000. Thepurchase of the earthmover will have no effect onrevenues, but it is expected to save the firm $35,000per year in before-tax operating costs, mainly labor.The firm’s marginal tax rate (federal plus state) is40%, and its MARR is 10%.(a) Is this project acceptable, based on the mostlikely estimates given?(b) Suppose that the project will require an increasein net working capital (spare-parts inventory) of$5,000, which will be recovered at the end ofyear 4. Taking this new requirement into account,would the project still be acceptable?(c) If the firm’s MARR is increased to 18% and withthe working capital requirement from (b) not ineffect, what would be the required savings inlabor so that the project remains profitable?
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