A firm is concerned about the condition of someof its

Chapter , Problem 13-54

(choose chapter or problem)

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?