Two investments involving a virtual mold apparatus for producing dental crowns q

Question

Two investments involving a virtual mold apparatus for producing dental crowns qualify for different property classes. Investment A has a cost of $54,500.00, lasts 9 years with no salvage value, and costs $150,000 per year in operating expenses. It is in the 3-year property class. Investment B has a cost of $89,500.00, 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%.

Based upon the use of MACRS-GDS depreciation, compare the AW of each alternative.
AWA = $

AWB = $

Which should be selected? (Investment A; Investment 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

particulars / years

AW=F/Annuity Factor

AW=F/Annuity Factor

calculation of benefit cost of the investments investment a

particulars / years

0 1 2 3 4 5 6 7 8 9 a Investment - A Initial Investment                     54,500 b Operating Cost 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 c Depreciation in 3 - year class 0.3333 0.4445 0.1481 0.0741 d Depriciation ( B * C )    49,995    66,675    22,215    11,115 e total costs ( b + d ) 199,995 216,675 172,215 161,115 150,000 150,000 150,000 150,000 150,000 f Tax shield on @ 40 % of e    79,998    86,670    68,886    64,446    60,000    60,000    60,000    60,000    60,000 g cash flows after tax ( e - f ) 119,997 130,005 103,329    96,669    90,000    90,000    90,000    90,000    90,000 h Net cash flow ( g - d )                     54,500    70,002    63,330    81,114    85,554    90,000    90,000    90,000    90,000    90,000 i P V factors at 10 %                     54,500 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 j P V amounts 54500 63638.18 52338.84 60942.15 58434.53 55882.92 50802.65 46184.23 41985.66 38168.79 k NPV=Sum of cash flow   522877.96 l Annuity factor (A,N=9,i=10%)=5.7590 m

AW=F/Annuity Factor

522877.96 / 5.7590 n

AW=F/Annuity Factor

90793.19 investment b a Investment-B Initial Investment(A)                     89,500 b Operating Cost 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 c Depriciation in 7-year class 0.1429 0.2449 0.1749 0.1249 0.0893 0.0892 0.0893 0.0446 d Depriciation ( B * C )    17,863    30,613    21,863    15,613    11,163    11,150    11,163      5,575 e total costs ( b + d ) 142,863 155,613 146,863 140,613 136,163 136,150 136,163 130,575 125,000 f Tax shield on @40% of e    57,145    62,245    58,745    56,245    54,465    54,460    54,465    52,230    50,000 g cash flows after tax ( e - f )    85,718    93,368    88,118    84,368    81,698    81,690    81,698    78,345    75,000 h Net cash Flow ( g - d )                     89,500    67,855    62,755    66,255    68,755    70,535    70,540    70,535    72,770    75,000 i P V factors at 10 % 89500 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 j PV amounts                     89,500    61,686    51,864    49,778    46,961    43,797    39,818    36,196    33,948    31,807 k NPV=Sum of cash flow                   485,354 l Annuity factor (A,N=9,i=10%)=5.7590 m AW=F/Annuity Factor 485354.30 / 5.7590 n AW=F/Annuity Factor 84277.53 the equated cost a is 90793.18 and b is 84277.53 , since the cost b is less hence investment in b must be preferable

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.