A highway contractor is considering buying a new trench excavator that costs $34
ID: 2559868 • Letter: A
Question
A highway contractor is considering buying a new trench excavator that costs $343,000 and can dig a 3-foot-wide trench at the rate of 25 feet per hour. The annual number of feet to dig each year is 5,100. The machine's production rate will remain constant for the first 4 years of the operation and then decrease by 2 feet per hour for each additional year. The maintenance and operating costs will be $43 per hour. The contractor will depreciate the equipment with a five-year MACRS. At the end of 5 years, the excavator can be sold for $80,000. The contractor will earn an additional annual revenue of $127,000 with this new machine. Assuming the contractor's tax rate is 31% per year, determine the net present worth of the cash flow from this machine. The company's MARR is 11%
Explanation / Answer
Add Pv of salvage value less tax on gain
Written down value of asset = 19576.8
tax on gain =(80000-19576.8)*.31 =$18675.39
net cash inflow on sale of machine at the end of year 5 =80000- $18675.39 =61324.61
NPV
92651.64+
-343000
=378224.7 + 36181.52 -343000
=71406.24
Cost = $343000 annual number of feet to be digged annually = 5100 feet 25 feet per hour . Year 5 no of hrs required to dig 5100 feet @23 feet per hr =5100/23 =222 hrs maintenance cost foryear5 = 222*43 = $9546
Year1 year 2 year 3 year 4 year 5 Cash flow 127000 127000 127000 127000 127000 Less:Maintenance costs 8772 8772 8772 8772 9546 Less: depreciation 68600 109760 65856 39513.6 39513.6 49628 8468 52372 78714.4 77940.4 Less:tax @31% 15384.68 2625.08 16235.32 24401.46 24161.52 34243.32 5842.92 36136.68 54312.94 53778.88 add:depreciation 68600 109760 65856 39513.6 39513.6 Net cash flow 102843.3 115602.9 101992.7 93826.54 93292.48 Pv F @11% 0.90 0.81 0.73 0.66 0.59 Discc 92651.64 93825.92 74576.17 61806.45 55364.54Related Questions
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