Question

Aztec, a manufacturer of hard board and fiber cement sidings and panels, purchased
equipment for its new product line 9 years ago at a cost of $43,000. The asset has a
market value of $17,700, if it were sold now. The current asset is expected to provide
adequate services for another 3 years, given that the annual maintenance costs of $7250 is
provided. It is estimated that, if the current asset is continued in service, its final market
value will be $9600 three years from now. However, due to changing customer needs, a
new piece of machinery is being considered for the product line. The company can
purchase the new equipment at a cost of $51,000 and a $540 salvage value at the end of
15-year economic life. The new equipment has annual maintenance costs of $5250. The
SL method with a 15-years life and zero market value is used to write off both assets.
Determine whether replacement now is economical based on an after-tax annual worth
analysis with an effective tax rate of 38% and an after-tax MARR of 2% per year.

Answer 1

AWD(2%) = -$6465.04

AWC(2%) = -$5911.45

AWD(2%) < AWC(2%); therefore, the new equipment should be selected.

NOTE:

Defender: d =$43,000/15 = $2866.67

BVNOW= $43,000 - $25,800.00 = $17,200.00

Gain on disposal (if sold now) = $17,700 - $17,200.00 = $500

BV12 = $43,000 - $34,400.00 = $8600.00

Gain on disposal (if sold in three years) = $9600 - $8600.00 = $1000

EOY	BTCF	Depr.	TI	Income Tax	ATCF
0 -	-17,700		-500	190	-17,510.00
1-3	-7250	2866.67	-10,116.67	3844.33	-3405.67
3b	9600		1000	-380	9220

AWD(2%) = -$17,510.00 (A/P, 2%,3) - $3405.67 + $9220.00 (A/F, 2%,3)

= -$17,510.00 (0.3468) - $3405.67 + $9220.00 (0.3268)

= -$6465.04

Challenger:

d =$51,000/15 = $3400.00

EOY	BTCF	Depr.	TI	Income Tax	ATCF
0	-51,000				-51,000.00
1-15	-5250	3400	-8,650.00	3287	-1963
15	540		540	-205.2	334.8

AWC(2%) = -$51,000 (A/P, 2%, 15) - $1963.00 + $334.80 (A/F, 10%,15)

= -$51,000 (0.0778) - $1963.00 + $334.80 (0.0578)

= -$5911.45

AWD(2%) < AWC(2%); therefore, the new equipment should be selected.