use the pw method to select the better of the alternatives shown below. assume t
ID: 2755452 • Letter: U
Question
use the pw method to select the better of the alternatives shown below. assume that the defender was installed five years ago and that its macrs(gds) property class is seven years. the after-tax MARR is 10% per year, and the effective income tax rate is 40%
Definition of Alternatives:
0Alternative A: Retain an already owne machine (defender) in service for eigh more years.
Alternative B: Sell the defender and lease a new one (challenger) for eight years.
Alternative A (additional information)
Cost of defender five years ago = -$500,000
BV now (if kept) = $111,500
Estimated market value eight years from now = $50,000
Present MV = $150,000.
Annual Expenses Defender: Alternative A Challenger: Alternative B Labor -$300,000 -$250,000 Material -250,000 -100,000 Insurance & Propertey Taxes 4% of initial capital investment NONE Maintenance -$8,000 NONE Leasing cost NONE -$100,000Explanation / Answer
Answer: The PW of the cash flows of the two alterntives are:
Alternative A = - $1,798,470
Alternative B = - $1,305,823
Since the PW of the cash outflows of alternative B is less, it is to be selected.
The detailed calculations are shown below:
CASH FLOWS OF ALTERNATIVE - A 1 2 3 4 to 8 8 Labour -300000 -300000 -300000 -300000 Material -250000 -250000 -250000 -250000 Insurance -20000 -20000 -20000 -20000 Maintenance -8000 -8000 -8000 -8000 -578000 -578000 -578000 -578000 Tax shield @ 0.4 on the above expenses 231200 231200 231200 231200 Tax shield @ 0.4 on depreciation 17850 17850 8925 0 Salvage value 50000 Tax on salvage value at 0.4 -20000 Total cash flows -328950 -328950 -337875.2 -346800 30000 PVIF @ 10% 0.909091 0.826446 0.75131 0.75131 0.46651 PVIFA(10,5) 3.7908 PV -299046 -271860 -253851 -987709 13995 Present worth of cash flows -1798470 Depreciation 44624 44624 22312 0 CASH FLOWS OF ALTERNATIVE - B 1 to 8 Labour -250000 Material -100000 Lease rent -100000 -450000 Tax shield at 0.4 180000 Net cash flows -270000 PVIFA (10,8) 5.3349 PV -1440423 Add: Salvage Value of defender 150000 Occuring at t =0 Tax on salvage value -15400 (0.4 of 150000-111500) Present Worth of Cash flows -1305823Related Questions
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