An analyst has been asked by the president of ellis

Reference no: EM13610189

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 are the operating cash flows in years 1, 2, and 3?
A. 20,184,23,160,15,720.
B. 15,920,18,800,11,600.
C. 23,880,28,200,17,400.
D. 19,920,22,800,15,600.

Reference no: EM13610189

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