Foghorn Leghorn may replace an old egg-sortingmachine used

Chapter , Problem 13-53

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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?