Question

Murphy Construction is considering buying a new crane. It will cost $200,000. They will pay $50,000...

Murphy Construction is considering buying a new crane. It will cost $200,000. They will pay $50,000 to have it modified and delivered. It has a five-year class life. At the end of three years, they plan to sell the machine for $100,000. The new machine will allow MC to increase revenues by $90,000 each year and expenses will increase by $10,000 each year. Inventory will increase by $3,000 if the machine is purchased, accounts payable will decrease by $1,000 and wages payable will increase by $6,000. Straight-line depreciation will be used. MC’s marginal tax rate is 34% and its cost of capital is 7%. Should MC purchase the new machine?

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