A European candy manufacturing plant manager must select a new irradiation syste

Question

A European candy manufacturing plant manager must select a new irradiation system to ensure the safety of specific ingredients, while being economical. The two alternatives available have the following estimates:

The company is in the 35% tax bracket and assumes classical straight line depreciation for alternative comparisons performed at an after-tax minimum acceptable rate of return (MARR) of 9% per year. A salvage value of zero is used when depreciation is calculated; however, system B can be sold after 5 years for an estimated 16% of its first cost. System A has no anticipated salvage value. Determine which is more economical using an annual worth (AW) analysis worked by hand.

The annual worth analysis for system A is determined to be $  .

The annual worth analysis for system B is determined to be $  .

System A B First Cost, $ –130,000 –70,000 CFBT, $ per Year 60,000 20,000 Life, Years 3 5

Explanation / Answer

Depreciation on System A= cost-salvage value /useful life= 130000/3= 43333.3333

Depreciation on System B= (70000-70000*0.16)/5= 11760

Annual worth calculation:

Ref Particulars-System A Year 0 Year 1 Year 2 Year 3 Investment -130,000.00 CFBT 60,000.00 60,000.00 60,000.00 Less: Depreciation -43,333.33 -43,333.33 -43,333.33 PBT 16,666.67 16,666.67 16,666.67 Less; Tax@35% -5,833.33 -5,833.33 -5,833.33 PAT 10,833.33 10,833.33 10,833.33 Add: Depreciation 43,333.33 43,333.33 43,333.33 A CFAT 54,166.67 54,166.67 54,166.67 B Discount factor@9% 1.00 0.9174 0.8417 0.7722 C=A*B Discounted cash flow -130000 49694.1896 45590.99964 41826.60517 D NPV 7,111.79 E Annuity factor(9%, 3Years) 2.5313 F=D/E Annual worth 2,809.55

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