businessfinancefinance questions and answersCase – I: Consider That Paragon Construction Inc., Wishes To Evaluate An Acquisition Of A New …Question: Case – I: Consider That Paragon Construction Inc., Wishes To Evaluate An Acquisition Of A New Earth Mover That Costs USD 60,000 Including Modification Cost Of USD 10,000. Mover Is Exclusively Needed For Special Use In The Newly Awarded Contract Site. Mover Requires An Increase In Net Working Capital Of USD 2,000 For Various Parts, Tools And Lubricating …This problem has been solved!See the answerCase – I:
Consider that Paragon Construction Inc., wishes to evaluate an
acquisition of a new earth mover that costs USD 60,000 including
modification cost of USD 10,000. Mover is exclusively needed for
special use in the newly awarded contract site. Mover requires an
increase in net working capital of USD 2,000 for various parts,
tools and lubricating oil which will be needed every year for the
entire useful life. Assume that mover falls in modified accelerated
cost recovery system (MACRS) 3-year class and that depreciation
slabs (rates) of 33%, 45% and 15% apply in year 1, 2 and 3
respectively. After 3 years, mover would be sold at USD 20,000. The
earth mover will have no effect on revenues but is expected to save
Paragon USD 40,000 pa in before-tax operating labour cost. The
company’s marginal tax rate is 40%, whereas cost of capital is
10%.
Required:
a) Calculate estimated cash flows of the earth mover. (Hint: you
will need to estimate/calculate both operating and non-operating
cash flows of the mover)
b) Calculate NPV and IRR of the mover.
c) What is the payback period of the mover?
d) Would you recommend acquisition of the mover?
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