1. Hsieh-Hseih Inc. must choose between two copiers: The ZZ20 or the GG50 . (The

Question

1.             Hsieh-Hseih Inc. must choosebetween two copiers: The ZZ20or the GG50. (The copier chosen will continue to be selected for the foreseeable future.)

The ZZ20costs $3,000(at t=0) and will last for three years.  For tax purposes, it will be depreciated using the straight line method over a 3- year life (at t=1, 2 and 3). The operating expenses for this copier are $2,200 per year(at t=1, 2 and 3).  This copier will require $500 of inventoryat t=0. Inventory will be decreased to $0 at t=3.

The GG50costs $3,800(at t=0) and will last for four years (t=1, 2, 3, and 4).  For tax purposes, it will (also) be depreciated using the straight line method over a 3- year life (t=1, 2 and 3). The operating expenses for this copier are $1,800 per year(for four years). This copier will require $500 of inventoryat t=0.  Inventory will be decreased to $0 at t=4.

If the appropriate discount rate is 12% and the tax rate is 40%, which copier should be selected?  Why? Be sure to quantify your answer.

Explanation / Answer

Statement showing Annual equivalent cost of ZZ20

Statement showing Annual equivalent cost of GG50

Since Annual equivalent cost of GG50 is less than ZZ20, one should select GG50

Particulars 0 1 2 3 Total Cost of ZZ20 -3000 WC required -500 Operating expense -2200 -2200 -2200 Depreciation -1000 -1000 -1000 PBT -3200 -3200 -3200 Tax savings @ 40% 1280 1280 1280 PAT -1920 -1920 -1920 Add: depreciation 1000 1000 1000 Annual cashflow -920 -920 -920 Release of WC 500 Total cash flow -3500 -920 -920 -420 PVIF @ 12% 1.0000 0.8929 0.7972 0.7118 Present value -3500 -821 -733 -299 -5354 Divided by PVIFA(12%,3 year) 2.40 Annual Equivalent cost -2229.05

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