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. Two alternatives are available, but others may be identified if these are not acceptable. Using the information shown, MACRS depreciation with n = 3 years, a 5-year study period, after-tax MARR = 7% per year, Te = 34%, and a spreadsheet, he obtained the results AWG = $ ? 2176 and AWH = $3545. Any tax effects when the equipment is salvaged were neglected. Thus, with MACRS depreciation, method H is the better method. Use classical SL depreciation with n = 5 years to evaluate the same alternatives. Is the decision different from that reached using MACRS?

Question

Answer 1

Method G: Years 1-5: CFBT = 35,000 – 15,000 = $20,000
SL D = 90,000/5 = $18,000
Taxes = (20,000 – 18,000)(0.34) = $680
CFAT = 20,000 – 680 = $19,320

AWG = -100,000(A/P,7%,5) + 19,320 + 10,000(A/F,7%,5)
= $-3330
Method H: Years 1-5: CFBT = 45,000 – 6,000 = $39,000
SL D = 130,000/5 = $26,000
Taxes = (39,000 – 26,000)(0.34) = $4420
CFAT = 39,000 – 4420 = $34,580

AWH = -150,000(A/P,7%,5) + 34,580 + 20,000(A/F,7%,5)
= $1474
Method H is selected; the same as with MACRS.