A highway contractor is considering buying a new trench excavator that costs $20

Question

A highway contractor is considering buying a new trench excavator that costs $200,000 and can dig a 1-metre-wide trench at the rate of 5 metres per hour. With the machine adequately maintained, its production rate will remain constant for the first 1200 hours of operation and then decrease by 0.5 metres per hour each year. The excavator is expected to dig 2 kilometres each year. Maintenance and operating costs will be $15 per hour. The excavator has a CCA rate of 30%. At the end of five years, the excavator will be sold for $40,000. Assuming that the contractor’s marginal tax rate is 34% per year, determine the annual after-tax cash flow.

Explanation / Answer

ANSWER:

particulars amount present value @30% amount  

1 1200*15=3000 0.769 2307

2 3000 1.300 2200

3 3000 0.769 2600

4 3000 0826 2472

5 43000 0.791 34013

43592

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