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You are evaluating a capital budgeting project that should last for 4 years. The project requires $600,000 of equipment with shipping cost of $20,000. The company will use the MACRS depreciation method. The MACRS depreciation rates are 33, 45, 15, and 7 percent. The new equipment would require $50,000 in working capital. The new equipment would reduce before tax labor cost by $220,000. After two years the equipment would be sold for $300,000. Tax rate is 40% and WACC is 10%. Would you accept the project?

You are evaluating a capital budgeting project that should last for 4 years. The project requires $600,000 of equipment with shipping cost of $20,000. The company will use the MACRS depreciation method. The MACRS depreciation rates are 33, 45, 15, and 7 percent. The new equipment would require $50,000 in working capital. The new equipment would reduce before tax labor cost by $220,000. After two years the equipment would be sold for $300,000. Tax rate is 40% and WACC is 10%. Would you accept the project?

EBK CFIN
EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter9: Capital Budgeting Techniques
Section: Chapter Questions
Problem 2PROB
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Problem 2: You are evaluating a capital budgeting project that should last for 4 years. The project requires $600,000 of equipment with shipping cost of $20,000. The company will use the MACRS depreciation method. The MACRS depreciation rates are 33, 45, 15, and 7 percent. The new equipment would require $50,000 in working capital. The new equipment would reduce before tax labor cost by $220,000. After two years the equipment would be sold for $300,000. Tax rate is 40% and WACC is 10%. Would you accept the project?
Transcribed Image Text:Problem 2: You are evaluating a capital budgeting project that should last for 4 years. The project requires $600,000 of equipment with shipping cost of $20,000. The company will use the MACRS depreciation method. The MACRS depreciation rates are 33, 45, 15, and 7 percent. The new equipment would require $50,000 in working capital. The new equipment would reduce before tax labor cost by $220,000. After two years the equipment would be sold for $300,000. Tax rate is 40% and WACC is 10%. Would you accept the project?
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