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Determining the required rate of return

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Rader Railway is determining whether to purchase a new rail setter, which has a base price of $432,000 and would cost another $52,000 to install. The setter falls into the MACRS 3-year class, and it would be sold after three years for $220,000. Using the setter requires a $22,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $185,000 per year in before-tax operating cost (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 14 percent. Should the setter be purchased?

Reference no: EM131466604

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