Bottoms Up Diaper Service is considering the purchase of a new industrial washer

Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $10,000 and sell its old washer for $6,000. The new washer will last for 5 years and save $2,500 a year in expenses. The opportunity cost of capital is 14%, and the firm’s tax rate is 35%. What is the equivalent annual cost of the washer, if the firm uses straight-line depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $10,000 and sell its old washer for $6,000. The new washer will last for 5 years and save $2,500 a year in expenses. The opportunity cost of capital is 14%, and the firm’s tax rate is 35%. What is the equivalent annual cost of the washer, if the firm uses straight-line depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Tax rate= 35% Opportunity cost of capital = 14% Year 0 1 2 3 4 5 Purchase new washer 10,000 Sell the old washer 6,000.00 Net investment (4,000.00) Expenses saving 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 Depreciation 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 Net expense saving 500.00 500.00 500.00 500.00 500.00 After tax saving 325.00 325.00 325.00 325.00 325.00 Net present value = (2,884.25) Equivalent annual cost = 840.13

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