A company is considering building a new automated switching distribution substat

Question

A company is considering building a new automated switching distribution substation with a useful life of 20 years to support new suburban developments. The substation is located in a state in which the combined tax rate is 40%, and the telephone company uses a 15% real interest MARR to assess capital investment projects. Estimated real dollar revenues and costs are as follows:

The substation will be put into service on the first day of the telephone company’s fiscal year. Using MACRS depreciation, what will be the telephone company’s after tax equivalent uniform annual worth for the substation?

Category Amount Building initial cost $1,157,000 Building salvage cost $250,000 Equipment initial cost $775,000 Equipment cost year 2 $150,000 Equipment salvage value $36,500 Annual revenues $650,000 year 1 Revenue arithmetic gradient $20,000 year 2 to 5 Annual revenues $750,000 year 6 to 20 Annual operating expenses $185,000 first 10 years $230,000 year 11 to 15 $275,000 year 16 to 20

Explanation / Answer

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Initial Cost of Building

($1,157,000)

Equipment

($775,000)

($150,000)

Revenue

$650,000

$20,000

$20,000

$20,000

$20,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

Operating Expenses

($185,000)

$185,000

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($230,000)

($230,000)

($230,000)

($230,000)

($230,000)

$275,000

$275,000

$275,000

$275,000

$275,000

EBITDA

$2,767,000

$355,000

$205,000

$205,000

$205,000

$935,000

$935,000

$935,000

$935,000

$935,000

$520,000

$520,000

$520,000

$520,000

$520,000

$475,000

$475,000

$475,000

$475,000

$475,000

Building Depreciation

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

Equipment Depreciation

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

EBIT

$2,678,203.26

$266,203.26

$116,203.26

$116,203.26

$116,203.26

$846,203.26

$846,203.26

$846,203.26

$846,203.26

$846,203.26

$431,203.26

$431,203.26

$431,203.26

$431,203.26

$431,203.26

$386,203.26

$386,203.26

$386,203.26

$386,203.26

$386,203.26

EAT - Annual Worth

$1,606,921.96

$159,721.96

$69,721.96

$69,721.96

$69,721.96

$507,721.96

$507,721.96

$507,721.96

$507,721.96

$507,721.96

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Initial Cost of Building

($1,157,000)

Equipment

($775,000)

($150,000)

Revenue

$650,000

$20,000

$20,000

$20,000

$20,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

$750,000

Operating Expenses

($185,000)

$185,000

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($185,000)

($230,000)

($230,000)

($230,000)

($230,000)

($230,000)

$275,000

$275,000

$275,000

$275,000

$275,000

EBITDA

$2,767,000

$355,000

$205,000

$205,000

$205,000

$935,000

$935,000

$935,000

$935,000

$935,000

$520,000

$520,000

$520,000

$520,000

$520,000

$475,000

$475,000

$475,000

$475,000

$475,000

Building Depreciation

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

$45,350

Equipment Depreciation

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

$43,446.74

EBIT

$2,678,203.26

$266,203.26

$116,203.26

$116,203.26

$116,203.26

$846,203.26

$846,203.26

$846,203.26

$846,203.26

$846,203.26

$431,203.26

$431,203.26

$431,203.26

$431,203.26

$431,203.26

$386,203.26

$386,203.26

$386,203.26

$386,203.26

$386,203.26

EAT - Annual Worth

$1,606,921.96

$159,721.96

$69,721.96

$69,721.96

$69,721.96

$507,721.96

$507,721.96

$507,721.96

$507,721.96

$507,721.96

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