Air Links, a commuter airline company, is considering replacing one of its bagga

Question

Air Links, a commuter airline company, is considering replacing one of its baggage-handling machines with a newer and more efficient one. The current book value of the old machine is $48,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is $0, but the company can sell the machine now to another firm in the industry for $15,000. The new baggage-handling machine has a purchase price of $119,000 and an estimated useful life of 7 years. It has an estimated salvage value of $33,000 and is expected to realize economic savings on electric power usage, labor, and repair costs and also to reduce the amount of damaged luggage. In total, an annual savings of $58,000 will be realized if the new machine is installed. The current book value of the old machine is $48,000. The old machine's book value is being depreciated toward a zero salvage value by having a constant depreciation of $9,600 each year. You should use this depreciation amount when considering taxes and cash flow for the old machine. The new machine will be depreciated under a seven-year MARCRS class. The firm uses a 19% after-tax MARR with a marginal tax rate of 32%. Using the opportunity cost approach, what is the ANNUAL EQUIVALENT WORTH of the preferred alternative (eg, keep the current machine or replace the current machine immediately)? The answer could be a negative number.

Explanation / Answer

Air Links a commuter airline company Old Machinary Option 1 (Keeping Old One) Air Links a commuter airline company New Machinary Option2 Replacing Current machine Baggage Handling $48,000 Purchase price $119,000 Selling Old machine sell value $15,000 Purchase Price ($119,000) Current book value of old Machine $48,000 Annual Constant depreciation $9,600 Estimated Useful life 7 years Purchase Price $119,000 selling Old machine $15,000 Remaining useful life 5 Years $38,400 Salvage value $33,000 Estimated Useful life 7 Year Depreciation ($9,600) Estimaed salvage value Salvage value 0 Annual Cost ($58,000) Total annual saving (Electric power usage, Labor & repair cost) $58,000 Salvage value $33,000 Depreciation ($12,289.40) But Now can sell machinary to another Company $15,000 Expenses ($67,600) MARCRs Depreciable ammount Purchase price - salvage value Saving cost $58,000 Constant depreciation $9,600 Tax rate ($21,632.00) MARR 19% $86,000 ($58,289) Expenses ($45,968.00) Marginal tax rate 32% First year depeciation by MACRS, 7 Years Useful life rate 0.1429 $12,289.40 Tax Rate ($18,652.61) MARR ($8,733.92) ($39,636.79) MARR ($7,530.99) Annual equipement worth for option A ($8,733.92)

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