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
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