Question 11 Two investments involving a virtual mold apparatus for producing den

Question

Question 11 Two investments involving a virtual mold apparatus for producing dental crowns qualify for different property classes. Investment A has a cost of $62,500.00, lasts 9 years with no salvage value, and costs $150,000 per year in operating expenses. It is in the 3-year property dlass. Investment B has a cost of $88,500.00, lasts 9 years with no salvage value, and costs $125,000 per year. Investment B, however, is in the 7-year property class. The company marginal tax rate is 40%, and MARR is an after-tax 10%. isowanos depreciation, compare the Awof a. Based upon the use of MACRS-GDS depreciation, compare the AW of each alternative AWA Which should be selected? (Investment A; Investment B) b, what must be Investment B's cost of operating expenses for these two investments to be equivalent? $ Round your answer to 2 decimal places. The tolerance is /-10.

Explanation / Answer

a).Cost of 3 year macrs property class Investment A is as follows:

After Tax AW

(Total Cost)*(1-tax rate)

Total AW= 4560125

Investment B with a MACRS 7 year depreciation table would be as follows:

After Tax AW

(Total Cost)*(1-tax rate)

Total AW= 5985000

Considering lower AW in alternative A,alternative A should be chosen.

b). To make two investment equivalent,

Operating expenses in investment B should be -138866

Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Operating expenses 150000 150000 150000 150000 150000 150000 150000 150000 150000 Depreciation as per MACRS 2083333 2778125 925625 463125 0 0 0 0 0 Total Cost 2233333 2928125 1075625 613125 150000 150000 150000 150000 150000

After Tax AW

(Total Cost)*(1-tax rate)

1340000 1756875 645375 367875 90000 90000 90000 90000 90000

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