Capital budgeting techniques to evaluate replacement project

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Reference no: EM131975200

Mr. A. Bucci , the manager of the capital budgeting department at Cerci Plant Nursery Company (CPNC), is evaluating a capital budgeting project that involves the purchase of a new irrigation equipment.

The equipment costs $56,000 plus $4,000 installation cost and it falls into the MACRS five year-class.

The new equipment will save CPNC $20,000 in water cost each year. Mr. Bucii believes the project increases the net operating working capital by $6,000 when the equipment is installed and is ready to be utilized. Mr. Bucci expects to sell the equipment for $12,000 at the end of fifth year to be replaced by a new one. Mr. Bucci uses 10.5% cost of capital for this project. CPNC’s tax rate is 34 percent.

Use capital budgeting techniques to evaluate the replacement project.

Reference no: EM131975200

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