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...
An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes....
An asset used in a 4-year project falls in the 5-year MACRS
class for tax purposes. The asset has an acquisition cost of
$8,400,000 and will be sold for $2,040,000 at the end of the
project. If the tax rate is 23 percent, what is the aftertax
salvage value of the asset? Refer to (MACRS schedule) (Do
not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to the nearest
whole number.
An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for...
An asset used in a four-year project falls in the five-year
MACRS class (MACRS Table) for tax purposes. The asset has an
acquisition cost of $7,200,000 and will be sold for $1,620,000 at
the end of the project.
A) What is the book value of the equipment at the end of Year
4?
B) If the tax rate is 24 percent, what is the aftertax salvage
value of the asset?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Kropf Inc. has provided the following data concerning one of the products in its standard cost...
- In 2003, Johnson & Johnson (J&J) introduced the first drug-eluting stent (DES), a medical device inserted...
- Problem 11-19 (Algo) Internal Business Process Performance Measures [LO11-3] Tombro Industries is in the process of...
- Macroeconomics: Explain the modern DSGE approach to studying economic fluctuations.
- What is the buoyant force on a helium balloon in air if the balloon is spherical...
- A large rock is propelled off the edge of a cliff at an initial velocity of...
- ABC offers a broad portfolio of best quality vegetable oil based ingredients for application in food...
ADVERTISEMENT