Perform a PW-based after-tax replacement study from the information shown below using an after-tax MARR of 12% per year, Te of 35%, and a study period of 4 years. All monetary values are in $1000 units. Assume the assets will be traded at their original salvage estimates. Since no revenues are estimated, all taxes are negative and considered savings to the alternative. Solve by hand and by spreadsheet.
 FIGURE 1.png)
Find after-tax PW of costs over 4-year study period. DR is involved on the defender trade.
By hand:
Defender:
SL depreciation = (45,000 - 5000)/8 = $5000
Annual tax = (-OE – Depr)(Te)
= (-7000 – 5000)(0.35)
= $-4200 (tax savings)
CFAT = CFBT – taxes
= -7000 – (-4200)
= $-2800
PWD = -35,000 + 5000(P/F,12%,4) – 2800(P/A,12%,4)
= -35,000 + 5000(0.6355) – 2800(3.0373)
= $-40,327
Challenger:
MACRS depreciation over n = 5, but only 4 years apply
Defender trade depreciation recapture must be included.
Defender BV3 = 45,000 – 3(5000) = $30,000
SP = $35,000
DR = SP – BV = 5,000
Tax on DR = 5,000(0.35) = $1750
Challenger first cost = -24,000 - 1750 = $-25,750
MACRS depreciation is based on $24,000 first cost
 FIGURE 4.png)
25,750 – 2400(P/F,12%,1) - … - 4578(P/F,12%,4)
= $-34,787
Conclusion: Select the challenger with a lower PW of cost
Spreadsheet: Same decision; select the challenger
 ANSWER.png)
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