Question

PART III Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit is expected to produce $21,000 for each of the next 4 years and will be sold at the end of that time for an expected salvage value of $4,000. Maintenance and expenses on the equipment are expected to be $2,000 for the fisrt year and to increase by $500 per year for each successive year of operation. Rimrock is purchasing the equipment by paying S14,000 down and financing the balance at an effective interest rate of 10 percent to be repaid in three equal end-of-year payments. According to the following schedule Beginning Balance Accrued AccumulatedPayment Total Ending Balance ear Schedule Interest 10% S20,000 S13,957.70 S7,311.18 (S0.00) 2,2000 15,353.47 8,042.30 2,000 1,395.77 7,31.12 20,000 13,957.70 7,311.18 $8,042.30 $8,042.30 $8,042.30 The company will be using MACRS* accelerated depreciation with a 3-year life for computing income taxes. It has an effective composite tax rate of 40% and requires an after-tax MARR of 10 percent. What is the net present value of the proposed purchase? You must show all calculations in order to received partial or full credit MACRS percentages (33.33, 44.45, 14.81, 7.41)

Please explain your answer!

Answer 1

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