The Stanley Construction Company is contemplating the purchase 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;it would be sold after 3 years for $20,000;and it would require an increase in net working capital (spare parts inventory) of $2,000. The earth mover would have no effect on revenue, but is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The company's marginal federal-plus-state tax rate is 40%. Utilize the following MACRS rates for depreciation expense: Year Depreciation Rate 1 33% 2 45 3 15 4 7 1. What is the net cost of the earth mover? 2. What are the operating cash flows in years 1,2, & 3? 3. What are the additional (non-operating) cash flows in year 3? 4. If the project's cost of capital is 10%, should the earth mover be purchased? ***Note: Please show work so I can make sure I understand.
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