An analyst has been asked by the president of Ellis Construction Company to eval
ID: 2385621 • Letter: A
Question
An analyst has been asked by the president of Ellis Construction Company to evaluate the proposed acquisition of a new earthmover. The mover's basic price is $50,000, and it will cost another $10,000 to modify it for special use by Ellis Construction. Assume that the mover falls into the MACRS 3-year class. See table for recovery allowance percentages. It will be sold after 3 years for $20,000, and it will require an increase in working capital (spare parts inventory) of $2,000. The earthmover purchase will have no effect on revenues, but it is expected to save Ellis $20,000 per year in before-tax operating costs, mainly labor. Ellis's marginal federal-plus-state tax rate is 40 percent.Recovery Allowance Percentage
Year 3-Year
1 33%
2 45%
3 15%
4 7%
What is the terminal year cash flow?
A. $27,280.
B. $27,680.
C. $31,280.
Explanation / Answer
Correct answer: C Terminal year cash flow Return of NWC $2,000 Salvage Value 20,000 Book Value cost - acc.dep 60,000 - 55800=4200 Gain 20,000 - 4200 = 15800 Taxes (15800)(.4)= -6320 Cash Flow 3 =31280