Question

Use the information provided on Caterpillar Inc. to answer the following four parts:

Caterpillar Inc. (CAT) is considering purchasing a new soil compactor for $300,000, and it would cost another $20,000 to modify it for special use by the firm. The company expended $40,000 traveling to various dealers in search of the new machine. The selected equipment falls into the MACRS 3-year class (33%, 45%, 15%, 7%), and could be sold after 3 years for $30,000. The equipment is expected to increase before-tax revenues by $200,000 per year, but annual costs will amount to $50,000. The firm's marginal federal-plus-state tax rate is 40% and its WACC is 10%.

a) What is the initial cash outflow for the expansion project?

-$300,000

-$340,000

-$320,000

-$360,000

None of the above

b) What is the depreciation outlay in the fourth year?

$22,400

$105,600

$0

$48,000

None of the above

c) What is the total cash inflow in year three?

$109,200

$136,160

$132,240

$147,600

None of the above

d) What is the net present value (NPV) for the expansion project and should the company accept or reject?

$24,500.68, Accept

$4,245.23, Accept

$24,500.68, Reject

$4,245.23, Reject

None of the above

Answer 1

a)Option C
2)option C
3)option B
4)Option E