You have been asked by the president of the Farr Construction Company to evaluat

Question

You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The mover%u2019s basic price is $50,000, and it would cost another $10,000 to modify it for special use. Assume that the mover falls into the MACRS 3 year class (see appendix 11A), that it would be sold after 3 years for $20,000, and that it would require an increase in net working capital (spare parts inventory) of $2,000. The earth mover would have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm%u2019s marginal federal-plus state tax rate is 40%.

Explanation / Answer

a. What are the Year-0 cash flows?

                        Price                                                    -$50,000

                        Modification                                       -10,000

                        Change in net working capital                -2,000

                        Total investment                                 -$62,000

b. What are the operating cash flows in Years 1, 2 and 3?

                                                                        Year 1             Year 2             Year 3

1. After

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