Elias wants to perform an after-tax evaluation of equivalent methods to electrostatically remove airborne particulate matter from clean rooms used to package liquid pharmaceutical products. Using the information shown, MACRS depreciation with n = 3 years, a 5-year study period, after-tax MARR = 7% per year, and Te = 34% and a spreadsheet, he obtained the results AWA = $ ? 2176 and AWB = $3545. Any tax effects when the equipment is salvaged were neglected. Method B is the better method. Now, use classical SL depreciation with n = 5 years to select the better method. Is the decision different from that reached using MACRS? After solving by hand, verify your answer using a spreadsheet

Question

Answer 1

Method A: Years 1-5, Depreciation = (100,000 – 10,000)/5 = $18,000

CFBT = 35,000 – 15,000 = $20,000

Taxes = (20,000 – 18,000)(0.34) = $680

CFAT = 20,000 – 680 = $19,320

AWA = -100,000(A/P,7%,5) + 19,320 + 10,000(A/F,7%,5)

= $-3330



Method B: Years 1-5, Depreciation = (150,000 – 20,000)/5 = $26,000

CFBT = 45,000 – 6,000 = $39,000

Taxes = (39,000 – 26,000)(0.34) = $4420

CFAT = 39,000 – 4420 = $34,580



AWB = -150,000(A/P,7%,5) + 34,580 + 20,000(A/F,7%,5)

= $1474



Method B is selected, the same as when MACRS is detailed.



Spreadsheet: Select Method B.