Question
In: Accounting
A portable concrete test instrument used in construction for evaluating and profiling concrete surfaces (MACRS-GDS 5-year...
A portable concrete test instrument used in construction for evaluating and profiling concrete surfaces (MACRS-GDS 5-year property class) is under consideration by a construction firm for $25,500. The instrument will be used for 6 years and be worth $2,500 at that time. The annual cost of use and maintenance will be $13,000. Alternatively, a more automated instrument (same property class) available from the manufacturer costs $26,000, with use and maintenance costs of only $7,500 and salvage value after 6 years of $3,000. The marginal tax rate is 25%, and MARR is an after-tax 12%.
Determine which alternative is less costly, based upon comparison of after-tax annual worth. Show the AW values used to make your decision.
Solutions
Expert Solution
Given in the question following information,
Tax Rate= 25%, MARR (after tax)= 12%(i)
Equipment 1:(A portable concrete ) Initial Cost-$25,500, Life-6 years(n), Salvage value= 2500, Annual cost= $13,000
| Year | Initial cost (A) | Annual cost (B) |
Salavge C) |
Depreciation Rate (D) | Dep Amount(cost *rate)=(25500*D) | Discounting factor @ 12% (E) | Cash flow F=(A+B+C+D) |
After tax cash flow G=(F*0.75) |
Discounted cash flow H = (G*E) |
| 0 | (25500) | 1 | (25500) | (19125) | (15300) | ||||
| 1 | (13000) | 20% | 5100 | 0.8928 | (7900) | (5925) | (5290) | ||
| 2 | (13000) | 32% | 8160 | 0.7972 | (4840) | (3630) | (2894) | ||
| 3 | (13000) | 19.20% | 4896 | 0.7118 | (8104) | (6078) | (4326) | ||
| 4 | (13000) | 11.52% | 2937.60 | 0.6355 | (10062.40) | (7546.8) | (4769) | ||
| 5 | (13000) | 11.52% | 2937.60 | 0.5674 | ((10062.40) | (7546.8) | (4282) | ||
| 6 | (13000) | 2500 | 5.76% | 1468.8 | 0.5066 | (9031.20) | (6773.40) | (3431) | |
| Total | PW | (40292) | |||||||
| AW | PMT(12%,6,-40292)=9800.05 |
Present Worth = (Sum of H above)= $(40,292)
Annual Worth =$9800.05
[I have attached the PMT Calculation Excel sheet below]
Equipment 1:( More automated instrument) Initial Cost-$26000, Life-6 years(n), Salvage value= 3000, Annual cost= $7500
| Year | Initial cost (A) | Annual cost (B) |
Salavge C) |
Depreciation Rate (D) | Dep Amount(cost *rate)=(26000*D) | Discounting factor @ 12% (E) | Cash flow F=(A+B+C+D) |
After tax cash flow G=(F*0.75) |
Discounted cash flow H = (G*E) |
| 0 | (26000) | 1 | (26000) | (19500) | (19500) | ||||
| 1 | (7500) | 20% | (5200) | 0.8928 | (12700) | (9525) | (8504) | ||
| 2 | (7500) | 32% | (8320) | 0.7972 | (15820) | (11865) | (9459) | ||
| 3 | (7500) | 19.20% | (4992) | 0.7118 | (12492) | (9369) | (6669) | ||
| 4 | (7500) | 11.52% | (2995) | 0.6355 | (10495) | (7871) | (5002) | ||
| 5 | (7500) | 11.52% | (2995) | 0.5674 | (10495) | (7871) | (4466) | ||
| 6 | (7500) | 3000 | 5.76% | (1498) | 0.5066 | (5998) | (4499) | (2279) | |
| Total | PW | (55876) | |||||||
| AW | PMT(12%,6,-55876)=13590.48 |
Present worth= (Sum of H above)= (55876)
Annual Worth =$13590.48
[I have attached the PMT Calculation Excel sheet below]
Comparison table
| Particular | Alt 1 | Alt 2 |
| After-Tax Annual Worth | -$9800.05 | -$13590.48 |
It can be seen that After-Tax Annual worth of Alt 2 is higher than Alt 1, so Alt 1 should be Preferred
Decision: Alt 1 that is Portable concrete should be preferred as it is more cost-effective as per after-tax Annual worth
If u have any query plz plz ask in the comment section
and if u find this solution helpful plz upvote!
ekkarill92 answered 2 years agoRelated Solutions
A portable concrete test instrument used in construction for evaluating and profiling concrete surfaces (MACRS-GDS 5-year...
A portable concrete test instrument used in construction for
evaluating and profiling concrete surfaces (MACRS-GDS 5-year
property class) is under consideration by a construction firm for
$18,500. The instrument will be used for 6 years and be worth
$3,000 at that time. The annual cost of use and maintenance will be
$13,000. Alternatively, a more automated instrument (same property
class) available from the manufacturer costs $32,500, with use and
maintenance costs of only $5,500 and salvage value after 6 years...
Two mutually exclusive alternatives, A and B (both MACRS-GDS 5 year property), are available. Alternative A...
Two mutually exclusive alternatives, A and B (both MACRS-GDS 5
year property), are available. Alternative A requires an original
investment of $100,000, has a useful life of 6 years, annual
operating costs of $2,500, and a salvage value at the end of year k
given by $100,000 (0.70)k. Alternative B requires an
original investment of $150,000, has a life of 8 years, zero annual
operating costs, and a salvage value at the end of year k given by
$150,000(0.80)k. The...
An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS...
An asset used in a 4-year project falls in the 5-year MACRS
class (refer to MACRS table on page 277), for tax purposes. The
asset has an acquisition cost of $16,517,578 and will be sold for
$7,378,085 at the end of the project. If the tax rate is 0.28, what
is the aftertax salvage value of the asset ?
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for...
An asset used in a 4-year project falls in the 5-year MACRS
class (MACRS Table) for tax purposes. The asset has an acquisition
cost of $12,240,000 and will be sold for $2,720,000 at the end of
the project.
If the tax rate is 23 percent, what is the aftertax salvage
value of the asset?
Multiple Choice
$2,580,867
$2,094,400
$2,859,133
$2,709,910
$2,451,823
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for...
An asset used in a 4-year project falls in the 5-year MACRS
class (MACRS Table) for tax purposes. The asset has an acquisition
cost of $18,180,000 and will be sold for $4,040,000 at the end of
the project.
Required:
If the tax rate is 33 percent, what is the aftertax salvage
value of the asset?
Options
$3,743,496
$2,706,800
$4,336,504
$3,930,671
$3,556,322
An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS...
An asset used in a 4-year project falls in the 5-year MACRS
class (refer to MACRS table on page 277), for tax purposes. The
asset has an acquisition cost of $17341411 and will be sold for
$7116692 at the end of the project. If the tax rate is 0.29, what
is the aftertax salvage value of the asset (SVNOT)?
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for...
An asset used in a 4-year project falls in the 5-year MACRS
class (MACRS Table) for tax purposes. The asset has an acquisition
cost of $12,420,000 and will be sold for $2,760,000 at the end of
the project.
If the tax rate is 23 percent, what is the aftertax salvage
value of the asset?
Multiple Choice
$2,618,820
$2,125,200
$2,901,180
$2,749,762
$2,487,879
An investment of $600,000 is made in equipment that qualifies as 3-year equipment for MACRS-GDS depreciation....
An investment of $600,000 is made in equipment that qualifies as
3-year equipment for MACRS-GDS depreciation. The before-tax cash
flows, measured in constant dollars, for the investment consist of
a uniform annual series of $200,000 plus a $200,000 salvage value
at the end of the 5-year planning horizon. A 40% tax rate and 3%
inflation rate apply. The real ATMARR is 10%
a. Determine the after-tax cash flows, in constant dollars, for
each year.
b. Determine the present worth for...
10.Calculating Salvage ValueAn asset used in a 4-year project falls in the 5-year MACRS class for...
10.Calculating Salvage ValueAn asset used in a 4-year project
falls in the 5-year MACRS class for tax purposes. The asset has an
acquisition cost of $7.6 million and will be sold for $1.4 million
at the end of the project. If the tax rate is 21 percent, what is
the aftertax salvage value of the asset?
11.Calculating NPVThurston Petroleum is considering a new
project that complements its existing business. The machine
required for the project costs $4.1 million. The marketing...
Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS...
Three years ago, you purchased some 5-year MACRS equipment at a
cost of $135,000. The MACRS rates are 20 percent, 32 percent, 19.2
percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1
to 6, respectively. You sold the equipment today for $82,500. Which
of these statements is correct if your tax rate is 23 percent and
you ignore bonus depreciation?
Multiple Choice
The tax due on the sale is $10,032.60.
The book value today is $40,478.
The book...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- What are the advantages and disadvantages of having multiple suppliers for a given medical device component...
- Hal Thomas, a 30-year-old college graduate, wishes to retire at age 65. To supplement other sources...
- Allocation: Fixed and Variable Costs, Budgeted Fixed and Variable Costs Biotechtron, Inc., has two research laboratories...
- Do you think that there is still institutionalized racial discrimination in the United States today and...
- Computer Security Consider a desktop publishing system used to produce documents for various organizations. a. Give...
- Review the discussion question and answer below. Do you agree with the answer? why or why...
- For the assignment you have to do two thing Passing arguments when running the jar or...
ADVERTISEMENT