Five years ago, Thomas Martin installed

Typically there are two alternatives in a replacementanalysis. One alternative is to replace the defendernow. The other alternative is which one of the fol-lowing?A.Keep the defender for its remaining useful life.B.Keep the defender for another year and thenreexamine the situation.C.Keep the defender until there is an improvedchallenger that is better than the presentchallenger.D.The answer to this question depends on the dataavailable for the defenderand challengeras wellas the assumptionsmade regarding the period ofneeded service and future challengers

The defenders economic life can be found if cer-tain estimates about the defender can be made.Assuming those estimates prove to be exactly cor-rect, one can accurately predict the year whenthe defender should be replaced, even if noth-ing is known about the challenger. True or false?Explain.

A proposal has been made to replace a largeheat exchanger (3 years ago, the initial cost was$85,000) with a new, more efficient unit at acost of $120,000. The existing heat exchangeris being depreciated by the MACRS method. Itspresent book value is $20,400, but its scrap valuejust equals the cost to remove it from the plant.In preparing the before-tax economic analysis,should the $20,400 book value of the old heatexchanger beA.addedto the cost of the new exchanger?B.subtractedfrom the cost of the new exchanger?C.ignoredin this before-tax economic analysis?

Which one of the following is the proper dollarvalue of defender equipment to use in replacementanalysis?A.Original costB.Present market valueC.Present trade-in valueD.Present book valueE.Presentreplacementcost,if different from orig-inal cost

Consider the following data for a defender asset.What is the correct replacement analysis technique to compare this asset against a competing chal-lenger? How is this method used? That is, whatcomparison is made, and how do we choose?BTCF in YearnYear,n(marginal costs)1$20002175031500412505100061000710008150092000103000

Describe an example in a replacement analysis sce-nario wherethe replacementis beingconsidereddueto(a)reducedperformance of the existing equipment.(b)altered requirements.(c)obsolescence of the existing equipment.(d)risk of catastrophic failure or unplannedreplacement of the existing equipment.

A pulpwood-forming machine was purchased andinstalled 8 years ago for $45,000. The declared sal- vage value was $5000,with a useful life of 10 years.The machine can be replaced with a more efficientmodel that costs $75,000, including installation.The present machine can be sold on the open mar-ketfor $14,000.The cost to remove the old machineis $2000. Which are the relevant costs for the oldmachine?

A machine that has been used for one year has asalvage value of $10,000 now, which will drop by$2000 per year. The maintenance costs for the next4 years are $1250,$1450, $1750,and $2250.Deter-mine the marginal cost to extend service for each ofthe next 4 years if the MARR is 8%.

A drill press was purchased2 years ago for $40,000.The press can be sold for $15,000 today, or for$12,000, $10,000, $8000, $6000, $4000, or $2000at the ends of each of the next 6 years. The annualoperating and maintenance cost for the next 6 yearswill be $2700, $2900, $3300, $3700, $4200, and$4700. Determine the marginal cost to extend ser-vice for each of the next 6 years if the MARR is12%.If a new drill presshas an EACof $7000,whenshould the drill press be replaced?

A machine has a first cost of $50,000. Its mar-ket value declines by 20% annually. The oper-ating and maintenance costs start at $3500 peryear and climb by $2000 per year. The firmsMARR is 9%. Find the minimum EUAC for thismachineandits economiclif

A machine has a first cost of $10,000. Its marketvalue declines by 20% annually. The repair costsare covered by the warranty in Year 1, and then theyincrease $600 per year. The firms MARR is 15%.Find the minimum EUAC for this machine and itseconomic life.

A vehicle has a first cost of $20,000. Its marketvalue declines by 15% annually. It is used by a firmthat estimates the effect of older vehicles on thefirms image. A new car has no image cost. Butthe image cost of older vehicles climbs by $700 peryear. The firms MARR is 10%. Find the minimumEUAC for this vehicle and its economic life

The Clap Chemical Company needs a largeinsulated stainless steel tank to expand its plant.Clap has located such a tank at a recently closedbrewery. The brewery has offered to sell the tankfor $15,000 delivered. The price is so low that Clapbelieves it can sell the tank at any future time andrecover its $15,000 investment.The outside of the tank is covered with heavyinsulation that requires considerable maintenance.InsulationYear Maintenance Cost0 $2000150021000315004200052500(a)Based on a 15% before-tax MARR, what life ofthe insulated tank has the lowest EUAC?(b)Is it likely that the insulated tank will bereplaced by anothertank at the end of the periodwith the lowest EUAC? Explain

The plant manager may purchase a piece of unusualmachinery for $10,000. Its resale value after 1 yearis estimated to be $3000. Because the device issought by antique collectors, resale value is rising$500 per year. The maintenance cost is $300 per year for eachof the first 3 years, and then it is expected to doubleeach year. Thus the fourth-year maintenance will be$600; the fifth-year maintenance,$1200, and so on.Based on a 15% before-tax MARR, what life of thismachinery has the lowest EUAC

Demonstrate how onewould calculatethe economiclife of a truck costing $30,000 initially, and atthe end of this and each following year (y)cost-ing OMRyin operation, maintenance and repaircosts. The truck is depreciated using the straight-line method over 5 years (i.e., $30,000/5=Dy).Its salvage value each year equals its book value.Develop an expression to show how to determinethe trucks economic lifethat is, the year whenthe trucks uniform equivalent annual cost is aminimum.Contributed by D. P. Loucks, Cornell University

Your firm is in need of a machine that costs $5000.During the first year the maintenance costs areestimated to be $400. The maintenance costs areexpected to increase by $150 each year up to atotal of $1750 at the end of Year 10. The machinecan be depreciated over 5 years using the straight- line method. Assume each years depreciation isa known amountDy. There is no salvage value.Develop an expression to show how you would findthe most economical useful life of this machine ona before-tax basis.Contributed by D. P. Loucks, Cornell University

A $40,000machinewill be purchasedby a companywhose interest rate is 12%. The installation cost is$5K, and removal costs are insignificant.What is itseconomic life if its salvage values and O&M costsare as follows?Year12345S$35K $30K $25K $20K $15KO&M $8K $14K $20K $26K $32K

Mytowns street department repaves a street every 8years. Potholes cost $12,000 per mile beginning atthe end of Year 3 after construction or repaving. Thecost to fix potholes generally increases by $12,000each year. Repaving costs are $180,000 per mile.Mytown uses an interest rate of 6%. What is theEAC for Mytowns policy? What is the EAC for theoptimal policy? What is the optimal policy?

A 2000-pound, counterbalanced, propane forkliftcan be purchased for $30,000. Due to the intendedservice use, the forklifts market value drops 20%of its prior years value in Years 1 and 2 and then declines by 15% until Year 10 when it will havea scrap/market value of $1000. Maintenance of theforklift is $400 per year during Years 1 and 2 whilethe warranty is in place. In Year 3 it jumps to $750and increases $200 per year thereafter. What is theoptimal life of the forklift?

A 2000-pound, counterbalanced, electric forkliftcan be purchased for $25,000 plus $3000 for thecharger and $3000 for a battery. The forklifts mar-ket value is 10% less for each of its first 6 years ofservice. After this period the market value declinesat the rate of 7.5% for the next 6 years.The battery has a life of 4 years and a salvagevalue of $300. The charger has a 12-year life anda $100 salvage value. The chargers market valuedeclines 20% per year of use. The batterys marketvalue declines by 30% of its purchase price eachyear. Maintenance of the charger and battery areminimal. The battery will most likely not work witha replacement forklift.Maintenance of the forklift is $200 per yearduring Years 1 and 2 while the warranty is in place.In Year3 it jumpsto $600andincreases$50per yearthereafter. What is the optimal ownership policy?

J&E Fine Wines recently purchased a new grapepress for $150,000. The annual operating and main- tenancecosts for the press are estimated to be $7500the first year.Thesecostsare expectedto increaseby$2200 each year after the first. The salvage value isexpectedto decreaseby $25,000eachyearto a valueof zero. Using an interest rate of 8%, determine theeconomic life of the press.

A chemical process in your plant leaves scaledeposits on the inside of pipes. The scale cannotbe removed, but increasing the pumping pressuremaintains flow through the narrower diameter. Thepipe costs $25 per foot to install, and it has no sal-vage value when it is removed. The pumping costsare $8.50 per foot of pipe initially, and they increaseannually by $6 per year starting in Year 2. What isthe economic life of the pipe if the interest rate is15%?

An electric oil pumps first cost is $45,000, and theinterest rate is 10%. The pumps end-of-year sal- vage values over the next 5 years are $42K, $40K,$38K, $32K, and $26K. Determine the pumps eco- nomic lif

A $20,000 machine will be purchased by a com-pany whoseinterestrate is 10%.It will cost$5000 to install, but its removal costs are insignificant. Whatis its economic life if its salvage values and O&Mcosts are as follows?

A $50,000 machinewill be purchasedby a companywhose interest rate is 15%. The installation cost is$8K, and removal costs are insignificant. What is itseconomic life if its salvage values and O&M costsare as follows?Year12345S$35K $30K $25K $20K $15KO&M $8K $14K $20K $26K $32K

A machine tool, which has been used in a plantfor 10 years, is being considered for replacement.It cost $9500 and was depreciated by MACRSdepreciation using a 5-year recovery period. Anequipment dealer indicates that the machine has noresale value. Maintenance on the machine tool hasbeen a problem, with an $800 cost this year. Futureannualmaintenance costs are expected to be higher.What is the economic life of this machine tool if itis kept in service?

In a replacement analysis problem, the followingfacts are known:Initial cost$12,000Annual maintenance YearNone13$200045$45006$7000+7$2500/yrSalvage value in any year is zero. Assume a 10%interest rate and ignore income taxes. Compute thelife for this challenger having the lowest EUAC.

An injection-molding machine has a first cost of$1,050,000 and a salvage value of $225,000 inany year. The maintenance and operating cost is$235,000 with an annual gradient of $75,000. TheMARR is 10%. What is the most economic life?

Five years ago, Thomas Martin installed productionmachinery that had a first cost of $25,000. At thattime initial yearly costs were estimated at$1250, increasing by $500 each year. The market value ofthis machineryeachyearwould be90%of the previ-ous years value. There is a new machine availablenow that has a first cost of $27,900 and no yearlycosts over its 5-year minimum cost life. If ThomasMartin uses an 8% before-tax MARR, when, if atall, should he replace the existing machinery withthe new unit?

Consider Problem 13-29 involving Thomas Martin.When,if atall, shouldthe old machinerybe replacedwith the new, given the following changes in thedata. The old machine retains only 70% of its valuein the market from year to year. The yearly costs ofthe old machine were $3000 in Year 1 and increaseat 10% thereafter

Mary OLearys company ships fine wool garmentsfrom County Cork, Ireland. Five years ago shepurchasedsome new automated packing equipmenthaving a first cost of $125,000 and a MACRS classlife of 7 years. The annual costs for operating,maintenance,and insurance,as well as marketvaluedata for each year of the equipments 10-year usefullife are as follows.YearAnnual Costs in YearnnnforMarket ValuenOperating Maintenance Insurance in Yearnnn1 $16,000 $ 5,000 $17,000 $80,0002 20,000 10,000 16,000 78,0003 24,000 15,000 15,000 76,0004 28,000 20,000 14,000 74,0005 32,000 25,000 12,000 72,0006 36,000 30,000 11,000 70,0007 40,000 35,000 10,000 68,0008 44,000 40,000 10,000 66,0009 48,000 45,000 10,000 64,00010 52,000 50,000 10,000 62,000Now Mary is looking at the remaining 5 yearsof her investment in this equipment, which shehad initially evaluated on the basis of an after-taxMARR of 25% and a tax rate of 35%. Assumethat the replacement repeatability assumptions arevalid.(a)What is the before-tax marginal cost for theremaining 5 years?(b)When, if at all, should Mary replace thispacking equipment if a new challenger, witha minimum EUAC of $110,000, has beenidentified?

SHOJ Enterprises has asked you to look at thefollowing data. The interest rate is 10%.Marginal EUAC ifCost Data KeptnYearsYear,nDefender Challenger1 $3000 $45002 3150 40003 3400 33004 3800 41005 4250 44006 4950 6000(a)What is thedefenderslowest EUAC?(b)What is thechallengerseconomic life?(c)When, if at all, should we replace thedefenderwith thechallenger?

Bills father read thateach year a cars valuedeclines by 25%. After a car is 3 years old, the rateof decline falls to 15%. Maintenance and operatingcosts increase as the car ages. Because of the man- ufacturers warranty, first-year maintenance is verylow.Age of Car Maintenance(years) Expense1$50215031804200530063907500Bills dad wants to keep his annual cost of carownership low. The car Bills dad prefers costs$11,200new. Shouldhe buy a new or a usedcarand,if used, when would you suggesthe buy it, and howlong should it be kept? Give a practical, rather thana theoretical, solution.

Should NewTechs computer system be replacedthis year? The system has a salvage value now of$5000, which will fall to $4000 by the end of theyear. The cost of lower productivity linked to theolder computer is $3000 this year. NewTech usesan interest rate of 15%. What is the cost advantageof the best system? A potential new system costs$12,000 and has the following salvage values andlost productivity for each year. YearSLost Productivity0 $12,00019,000$ 027,000100035,000200043,0003000

In evaluating projects, LeadTechs engineers usea rate of 15%. One year ago a robotic transfermachine was installed at a cost of $38,000. At thetime, a 10-year life was estimated, but the machinehas had a downtime rate of 28% which is unac-ceptably high. A $12,000 upgrade should fix theproblem, or a labor-intensive process costing $3500in direct labor per year can be substituted. The plantestimates indirect plant expenses at 60% of directlabor, and it allocates front office overhead at 40%of plant expenses (direct and indirect). The robothas a value in other uses of $15,000. What is thedifference between the EACs for upgrading andswitching to the labor-intensive process?

A new $40,000 bottling machine has just beeninstalled in a plant. It will have no salvage valuewhen it is removed. The plant manager has askedyou to estimate the machineseconomicservice life,ignoring income taxes. He estimates that the annualmaintenancecost will be constantat $2500per year.What service life will result in the lowest equivalentuniform annual cost?

Big-J Construction Company, Inc. (Big-J CC) isconducting a routine periodic review of existingfield equipment. They use a MAAR of 20%. Thisincludes a replacement evaluation of a pavingmachine now in use. The machine was purchased3 years ago for $200,000, The pavers current mar-ket value is $120,000, and yearly operating andmaintenance costs are as follows.Operating Maintenance MarketValueYear, Cost in Cost in if SoldnYearnYearnin Yearn1 $15,000 $ 9,000 $85,0002 15,000 10,000 65,0003 17,000 12,000 50,0004 20,000 18,000 40,0005 25,000 20,000 35,0006 30,000 25,000 30,0007 35,000 30,000 25,000 Data for a new paving machine have been ana-lyzed. Its most economic life is at 8 years, witha minimum EUAC of $62,000. When should theexisting paving machine be replaced?

VMIC Corp. has asked you to look at the followingdata. The interest rate is 10EUACrginal IfCost Data KeptnYearsYear,nDefender Challenger1 $2500 $45002 2400 36003 2300 30004 2550 26005 2900 27006 3400 35007 4000 4000(a)What is thedefenderslowest EUAC?(b)What is thechallengersminimum cost life?(c)When, if at all, should we replace thedefenderwith thechallenger?

Eight years ago, the Blank Block Building Com-pany installed an automated conveyor system for$38,000. When the conveyor is replaced, the netcost of removal will be $2500. The minimum EACof a new conveyor is $5500. When should the con-veyor be replaced if BBBs MARR is 12%? TheO&M costs for the next 5 years are $5K, $6K, $7K,$8K, and $9K

You are considering the purchase of a newhigh-efficiency machine to replace older machinesnow. The new machine can replace four of the oldermachines,each with a current marketvalue of $600.The new machine will cost $5000 and will save theequivalent of 10,000 kWh of electricity per year.After a period of 10 years, neither option (new orold) will have any market value. If you use a before-tax MARR of 25% and pay $0.075 per kilowatt-hour, would you replace the old machines todaywith the new one?

The Quick Manufacturing Company, a largeprofitable corporation, may replace a produc-tion machine tool. A new machine would cost$3700, have a 4-year useful and depreciable life,and have no salvage value. For tax purposes,sum-of-years-digits depreciation would be used.The existing machine tool cost $4000 4 years ago and has been depreciated by straight-line deprecia-tion assuming an 8- year life and no salvage value.The tool could be sold now to a used equipmentdealer for $1000 or be kept in service for another4 years. It would then have no salvage value. Thenew machinetool would saveabout$900 peryearinoperating costs compared to the existing machine.Assume a 40% combined state and federaltax rate. Compute the before-tax rate of returnon the replacement proposal of installing thenew machine rather than keeping the existingmachin

A professor of engineering economics owns a 1996car. In the past 12 months, he has paid $2000 toreplace the transmission, bought two new tires for$160, and installed a CD player for $110. He wantsto keep the car for 2 more years becausehe investedmoney 3 years ago in a 5-year certificate of deposit,which is earmarked to pay for his dream machine, ared European sports car. Today the old cars enginefailed. The professor has two alternatives. He canhave the engine overhauled at a cost of $1800 andthen most likely have to pay another $800 per yearfor the next 2 years for maintenance. The car willhave no salvage value at that time. Alternatively,a colleague offered to make the professor a $5000loan to buy another used car. He must pay the loanback in two equal installments of $2500 due at theend of Year 1 and Year 2, and at the end of the sec-ond year he must give the colleague the car. Thenewused car has an expected annualmaintenancecost of $300. If the professor selects this alterna-tive, he can sell his current vehicle to a junkyard for$1500.Interest is 5%. Using presentworth analysis,which alternative should he select and why?

The Plant Department of the local telephonecompany purchased four special pole hole dig-gers 8 years ago for $14,000 each. They havebeen in constant use to the present. Owing to anincreased workload, additional machines will soonbe required.Recently an improved model of the digger wasannounced. The new machines have a higher pro-duction rate and lower maintenance expense thanthe old machines but will cost $32,000 each witha service life of 8 years and salvage value of $750each. The four original diggers have an immedi-ate salvage of $2000 each and an estimated salvagevalue of $500 each 8 years hence. The averageannual maintenance expense of the old machinesis about $1500 each,compared with $600 each for thenew machines.A field study and trial show that the workloadwould require three additional new machines if theold machines continue in service. However, if theold machines were all retired from service, theworkloadcould be carried by six new machineswithan annual savings of $12,000 in operation costs. Atraining program to prepare employees to run themachines will be necessary at an estimated cost of$700 per new machine. If the MARR is 9% beforetaxes, what should the company do?

MJ Inc. bought a manufacturing line 5 years agofor $35,000,000. At that time it was estimated tohave a service life of 10 years and salvage valueat the end of its service life of $10,000,000. JMJsCFO recently proposed to replace the old line witha modern line expected to last 15 years and cost$95,000,000.This line will provide $5,000,000sav-ings in annual operating and maintenance costs,increase revenues by $2,000,000, and have a$15,000,000 salvage value (after 15 years). Theseller of the new line is willing toacceptthe old lineas a trade-in for its current fair market value, whichis $12,000,000. The CFO estimates that if the oldline is kept for 5 more years, its salvage value willbe $6,000,000. If the JMJs MARR is 8% per year,should the company keep the old line or replace itwith the new line?Contributed by Hamed Kashani, Saeid Sadri, andBaabak Ashuri, Georgia Institute of Technology

A used car can be kept for two more years and thensold for an estimated value of $3000, or it can besold now for $7500. The average annual mainte-nance cost over the past 7 years has been $500 peryear. However, if the car is kept for two more years,this cost is expected to be $1800 the first year and$2000 the second year. As an alternative, a new carcan be purchased for $22,000 and be used for 4years, after which it will be sold for $8,000. Thenew car will be under warranty the first 4 years, andno extra maintenance cost will be incurred duringthose years. If the MARR is 15% per year, what isthe best option?Contributed by Hamed Kashani, Saeid Sadri, andBaabak Ashuri, Georgia Institute of Technology

A couple bought their house 10 years ago for$165,000. At the time of purchase, they madea $35,000 down payment, and the balance was financed by a 30-year mortgage with monthly pay-ments of $988.35. They expect to live in this housefor 20 years, after which time they plan to sell thehouse and move to another state. Alternatively, theycan sell the house now and live in a rental unit forthe next 20 years. The house can be sold now for$210,000,from which an8%real estatecommissionand $110,000 remaining loan balance and miscella-neous expenses will be deducted. If they stay in thehouse, the house can be sold after 20 years for$320,000 from which a 10% real estate commis-sion and $10,000 miscellaneous expenses will bededucted. A comparable rental unit rents for $960payable at the beginning of every month. No secu-rity deposit will be required of them to rent the unit,and the rent will not increaseif they maintain a goodpayment record. They use an interest rate of 0.5%per month for analyzing this financial opportunity.Should they stay in the house or should they sell itand move into a rental unit?Contributed by Hamed Kashani, Saeid Sadri, andBaabak Ashuri, Georgia Institute of Technology

Sacramento Cab Company owns several taxis thatwere purchased for $25,000 each 4 years ago. Thecabs current market value is $12,000 each, and ifthey are kept for another 6 years they can be soldfor $2000 per cab. The annual maintenance cost percab is $1000 per year. Sacramento Cab has beenapproached about a leasing plan that would replacethe cabs. The leasing plan calls for payments of$6000 per year. The annual maintenance cost foreach leased cab is $750 per year. Should the cabsbe replaced if the interest rate is 10%?

The Ajax Corporation purchased a railroad tankcar 8 years ago for $60,000. It is being depreci-ated by SOYD depreciation, assuming a 10-yeardepreciable life and a $7000 salvage value. Thetank car needs to be reconditioned now at a cost of$35,000. If this is done, it is estimated the equip-ment will last for 10 more years and have a $10,000salvage value at the end of the 10 years.On the other hand, the existing tank car couldbe sold now for $10,000 and a new tank carpurchased for $85,000. The new tank car wouldbe depreciated by MACRS depreciation. Its esti-mated actual salvage value after 10 years would be $15,000. In addition, the new tank car would save$7000 per year in maintenance costs, compared tothe reconditioned tank car.Based on a 15% before-tax rate of return,determine whether the existing tank car shouldbe reconditioned or a new one purchased.Note:The problem statement provides more data thanare needed, which is typical of real situations.

State the advantagesand disadvantageswith respectto after-tax benefits of the following options for amajor equipment unit:A.Buy new.B.Trade in and buy a similar, rebuilt equipmentfrom the manufacturer.C.Have the manufacturer rebuild your equipmentwith all new available options.D.Have the manufacturer rebuild your equipmentto the original specifications.E.Buy used equipment.

Fifteen years ago the Acme ManufacturingCompany bought a propane-powered forklift truckfor $4800. The company depreciated the forkliftusing straight-line depreciation, a 12-year life, andzero salvage value. Over the years, the forklift hasbeen a good piece of equipment, but lately themaintenance cost has risen sharply. Estimated end-of-year maintenance costs for the next 10 years areas follows:Year Maintenance Cost1 $ 4002600380041000510 1400/yearThe old forklift has no present or future netsalvage value, since its scrap metal value just equalsthe cost to haul it away.A replacementis now beingconsideredfor the old forklift. A modern unit can bepurchased for $6500. It has an economic life equalto its 10-year depreciable life. Straight-line depre-ciation will be employed,with zero salvage value atthe end of the 10-year depreciable life. At any time the new forklift can be sold for its book value.Main-tenance on the new forklift is estimated to be a con-stant $50 per year for the next 10 years, after whichmaintenanceis expected to increase sharply.ShouldAcme Manufacturing keep its old forklift truck forthe present, or replace it now with a new one? Thefirm expects an 8% after-tax rate of return on itsinvestments. Assume a 40% combined state-and-federal tax rate.

MachineAhas been completely overhauled for$9000 and is expected to last another 12 years. The$9000 was treated as an expense for tax purposeslast year. MachineAcan be sold now for $30,000net after selling expenses, but will have no salvagevalue 12 years hence. It was bought new 9 yearsago for $54,000 and has been depreciated sincethen by straight-line depreciation using a 12- yeardepreciable life.Becauselessoutputis now required,MachineAcan be replaced with a smaller machine: MachineBcosts $42,000, has an anticipated life of 12 years,and would reduce operating costs $2500 per year. Itwould be depreciated by straight-line depreciationwith a 12- yeardepreciablelife and no salvagevalue.The income tax rate is 40%. Compare theafter-tax annual costs and decide whether MachineAshould be retained or replaced by MachineB.Usea 10% after-tax rate of return

A new employee at CLL Engineering Consult-ing Inc., you are askedto join a team performingan economic analysis for a client. Your task isto find the Time-0 ATCFs. CLL Inc. has a com-bined federal/state tax rate of 45% on ordinaryincome, depreciation recapture, and losses.Defender:This asset was placed in service7 years ago. At that time the $50,000 costbasis was set up on a straight- line depreciationschedule with an estimated salvage value of$15,000 over its 10-year ADR life. This assethas a present market value of $30,000.Challenger:Thenewassethasafirstcostof$85,000 and will be depreciated by MACRSdepreciation over its 10-year class life. Thisasset qualifies for a 10% investment tax credit. (b)How would your calculations change if thepresent market value of thedefenderis$25,500? (c)How would your calculations change if thepresent market value of thedefenderis$18,000?

Foghorn Leghorn may replace an old egg-sortingmachine used by his business, Foggys Farm FreshEggs. The old egg machine is not quite runningeggs-actly the way it was originally designed andwill require an additional investment now of $2500(expensed at Time 0) to get it back in workingshape. This old machine was purchased 6 yearsago for $5000 and has been depreciated by thestraight-line method at $500 per year. Six years agothe estimated salvage value for tax purposes was$1000. Operating expenses for the old machine areprojected at $600 this next year and are increas-ing by $150 per year each year thereafter. Foggyprojects that with refurbishing, the machine will lastanother 3 years. Foggy believes that he could sellthe old machine as-is today for $1000 to his friendFido to sort bones. He also believes he could sellit 3 years from now at the barnyard flea marketfor $500.The new egg-sorting machine, a deluxe model,has a purchaseprice of $10,000and will last 6 years,at which time it will have a salvage value of $1000.The new machine qualifies as a MACRS 7-yearproperty and will have operating expenses of $100the first year, increasing by $50 per year thereafter.Foghorn uses an after-tax MARR of 18% and a taxrate of 35% on original income.(a)What was the depreciation life used with thedefender asset (the old egg sorter)?(b)Calculate the after-tax cash flows for both thedefender and challenger assets.(c)Use the annual cash flow method to offer arecommendation to Foggy. What assumptionsdid you make in this analysis?

A firm is concerned about the condition of someof its plant machinery. Bill James, a newly hiredengineer, reviewed the situation and identified fivefeasible, mutually exclusive alternatives.Alternative A:Spend $44,000 now repairingvarious items. The $44,000 can be charged as acurrent operating expense (rather than capital-ized) and deducted from other taxable incomeimmediately. These repairs will keep the plantfunctioning for 7 years with current operatingcosts. Alternative B:Spend $49,000 to buygeneral-purpose equipment. Depreciationwould be straight line over the equipments7-year useful life. The equipment has no sal- vage value. The new equipment will reduceannual operating costs by $6000.Alternative C:Spend $56,000 to buy newspecialized equipment. This equipment wouldbe depreciated by sum-of-years- digits depre-ciation over its 7-year useful life. Thisequipment would reduce annual operatingcosts by $12,000. It will have no salvagevalue.Alternative D:This alternative is the same asAlternativeB, except it reduces annual operat-ing costs by $7000.Alternative E:This is the do nothingalternative, with annual operating costs $8000above the present level.This profitable firm pays 40% corporate incometaxes and uses a 10% after-tax rate of return. Whichalternative should the firm adopt?

Freds Rodent Control Corporation has been usinga low-frequency sonar device to locate subterraneanpests. This device was purchased 5 years ago for$18,000. The device has been depreciated usingSOYD depreciation with an 8-year depreciable lifeand a salvage value of $3600. Presently, it could besold for $7000. If it is kept for the next 3 years, itsmarket value is expected to drop to $1600.A new lightweight subsurface heat-sensingsearcher(SHSS) that is available for $10,000 wouldimprove the annual net income by $500 for each ofthe next 3 years. The SHSS would be depreciatedas a 5-year class property, using MACRS. At theend of 3 years, the SHSS should have a marketvalue of$4000.Freds RodentControl is a profitableenterprise subject to a 40% tax rate.(a)Construct the after-tax cash flow for the oldsonar unit for the next 3 years.(b)Construct the after-tax cash flow for the SHSSunit for the next 3 years.(c)Construct the after-tax cash flow for thedifference between the SHSS unit and the oldsonar unit for the next 3 years. (d)Should Fred buy the new SHSS unit if hisMARR is 20%? You do nothave to calculate theincremental rate of return; just show how youreach your decision.

Compute the after-tax rate of return on thereplacement proposal for Problem 13-23.

BC Junction purchased some embroideringequipment for their Denver facility 3 years agofor $15,000. This equipment qualified as MACRS5-year property. Maintenance costs are estimatedto be $1000 this next year and will increase by$1000per year thereafter. The market (salvage)value for the equipmentis $10,000 at the end of thisyear and declines by $1000 per year in the future.If BC Junction has an after-tax MARR of 30%,a marginal tax rate of 45% on ordinary income,depreciation recapture, and losses, what after-taxlife of this previously purchased equipment has thelowest EUAC? Use a spreadsheet to develop yoursolution.

Reconsider the acquisition of packing equipmentfor Mary OLearys business, as described inProblem 13-31. Given the data tabulated there, andagain using an after-tax MARR of 25% and a taxrate of 35% on ordinary income to evaluate theinvestment, determine the after-tax lowest EUAC ofthe equipment. Use a spreadsheet to develop yoursolution.