Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 6

A highway contractor is considering buying a new trench excavator that costs $250,000 and can dig a 3-foot-wide trench at the rate of 16 feet per hour. With the machine adequately maintained, its production rate will remain constant for the first 1,200 hours of operation and then decrease by 2 feet per hour for each additional 400 hours thereafter. The expected average annual use is 400 hours, and maintenance and operating costs will be $50 per hour. The contractor will depreciate the equipment in accordance with a five-year MACRS. At the end of five years, the excavator will be sold for $60,000. Assuming that the contractor's marginal tax rate is 35% per year, determine the annual after-tax cash flow.