A 2-year-old injection molding machine was expected to be kept in service for its projected life of 5 years, but a new challenger promises to be more efficient and have lower operating costs. You have been asked to determine if it would be economically attractive to replace the defender now or keep it for 3 more years as originally planned. The defender had a first cost of $300,000, but its market value now is only $100,000. It has chargeable expenses of $120,000 per year and no expected salvage value. To simplify calculations for this problem only, assume that SL depreciation was charged at $60,000 per year, and that it will continue at that rate for the next 3 years.
The challenger will cost $420,000, have a 3-year life, and no salvage value. It will have chargeable expenses of $30,000 per year, and it will be depreciated at $140,000 per year (again, using SL depreciation for simplicity for this problem only). Assume a Te of 35%, and an after-tax MARR of 15% per year. Determine (a) through (c) by hand.
(a) Determine the CFAT in year 0 for the challenger and defender. (Hint: There may be a DR, CG, or CL to consider.)
(b) Determine the CFAT in years 1 through 3 for the challenger and defender.
(c) Conduct an AW-based evaluation to determine if the defender should be kept for 3 more years or replaced now.
(d) Use a spreadsheet to perform the AW-based evaluation.
(a) Defender: CL = BV2 - sales price = [300,000 – 2(60,000)] - 100,000
= $-80,000
The CL of $-80,000 by the defender will result in tax consequences as follows:
Taxes = -80,000(0.35) = $-28,000
This represents a tax savings for the challenger in year 0.
CFAT0, challenger = $-420,000 + 28,000 = $-392,000
CFAT0, defender = $-100,000
(b) Defender, years 1-3: TI = -120,000 – 60,000 = $-180,000
Taxes = 180,000(0.35) = $-63,000
CFAT = -120,000 - (-63,000) = $-57,000
Challenger, years 1-3: TI = -30,000 -140,000 = $-170,000
Taxes = -170,000(0.35) = $-59,500
CFAT = -30,000 - (-59,500) = $29,500
(c) AWD = -100,000(A/P,15%,3) – 57,000
= -100,000(0.43798) – 57,000
= $-100,798
AWC = -392,000(A/P,15%,3) + 29,500
= -392,000(0.43798) + 29,500
= $-142,188
Conclusion: Keep the defender
(d) Spreadsheet shows CFAT and AW values; keep the defender.
 ANSWER.png)
You might also like to view...
The current rating of most outputs can range from 0.5 to about ____ amperes, depending on the make of the controller and the type of output being used.
A. one B. two C. three D. five
When creating an auxiliary view of a curved or irregular surface, you should project points on the curved edges to define them in the new view. For a circular hole, usually ____ radial points are sufficient.
A. one B. two C. three D. four
The overlap for a 32' extension ladder must be at least _____.
a. 1' b. 2' c. 3' d. 4'
To determine the polarity of a voltage drop, we simply consider the ____ of the current.
a. location b. direction c. magnitude d. strength