Question

Your company has just signed a​ three-year nonrenewable contract with the city of New Orleans for earthmoving work. You are investigating the purchase of heavy construction equipment for this job. The equipment costs ​$192,000 and qualifies for​ five-year MACRS depreciation. At the end of the​ three-year contract, you expect to be able to sell the equipment for $70,000. If the projected operating expense for the equipment is ​$70,000 per​ year, what is the​ after-tax equivalent uniform annual cost​ (EUAC) of owning and operating this​ equipment? The effective income tax rate is 28​%, and the​ after-tax MARR is 11​% per year.

The​ after-tax equivalent uniform annual cost is $?

Answer 1

EUAC	$100,889.59

Workings

Salvage
Purchase price	192000
Less: Depreciation	136704
Closing book value	55296
Selling price	70000
Gain/(loss)	14704
Tax/ Saving	4117.12
Net salvage	51178.88

Year	Initial cost	Tax shield= Depreciation*Tax rate	Salvage after tax	Operating expense after tax	Net CF
0	-192000				-192000
1		10752		-50400	-39648
2		17203.2		-50400	-33196.8
3		10321.92	51178.88	-50400	11100.8
				NPV	-246545.38
				EUAC	$100,889.59