Lane Construction Ltd. is considering the acquisition of a new dump truck. The t
ID: 1092422 • Letter: L
Question
Lane Construction Ltd. is considering the acquisition of a new dump truck. The truck's base price is $75,000, and it will cost another $15,000 to modify it for special use by the company. This truck falls into the MACRS five-year class. It will be sold after five years for $20,000. The truck purchase will have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs mainly in leasing expenses. The firm's marginal tax rate (federal plus state) is 40%, and its MARR is 15%. (a) Is this project acceptable based on the most likely estimates given in the problem? (b) If the firm's MARR is increased to 20%, what would be the required savings in leasing so that the project would remain profitable? (c) If the projected savings figure is only $25,000, would you still recommend the project?
Explanation / Answer
a)
NPV is positive. Therefore project is acceptable
2. If MARR= 20%
Annual savings have to be greater than 34930.12 for the project to be profitable
c)
No, because NPV is negative
0 1 2 3 4 5 Initial Cost -90000 Annual savings 35000 35000 35000 35000 35000 Depreciation % 20% 32% 19.20% 11.52% 11.52% Depreciation -18000 -28800 -17280 -10368 -10368 Net income 10200 3720 10632 14779.2 14779.2 After tax salvage value 14073.6 Cash flow -90000 28200 32520 27912 25147.2 39220.8 NPV 11,341.79Related Questions
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