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

​$203,000

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

​$74,000.

If the projected operating expense for the equipment is

​$68,000

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

10​%

per year.

The​ after-tax equivalent uniform annual cost is?

​(Round to the nearest​ dollar.)

Answer 1

	AFTER TAX EQUIVALENT UNIFORM ANNUAL COST
	NET PRESENT VALUE OF EQUIPMENT/ANNUITY FACTOR
	NET PRESENT VALUE OF EQUIPMENT	$                2,35,593
	ANNUITY FACTOR @10% FOR 3 YEARS	$                   2.4869
	AFTER TAX EQUIVALENT UNIFORM ANNUAL COST	$           94,735
COMPUTATION OF NET PRESENT VALUE OF EQUIPMENT
	YEAR 0	YEAR 1	YEAR 2	YEAR 3	TOTAL
ADD: COST OF EQUIPMENT	$              2,03,000.00				$          2,03,000.00
ADD: OPERATING EXPENSES AFTER TAX		$              48,960.00	$        48,960.00	$ 48,960.00	$          1,46,880.00
LESS: TAX BENEFIT ON DEPRECIATION		$              11,368.00	$        18,188.80	$ 10,913.28	$             40,470.08
LESS: SALES PROCEEDS OF EQUIPMENT				$ 74,000.00	$             74,000.00
NET COST	$              2,03,000.00	$              37,592.00	$        30,771.20	-$ 35,953.28	$          2,35,409.92
P V F@10% FOR 3 YEARS	1	0.909090909	0.826446281	0.7513148
NET PRESENT VALUE OF EQUIPMENT	$              2,03,000.00	$              34,174.55	$        25,430.74	-$ 27,012.23	$     2,35,593.06
DEPRECIATION SCHEDULE
COST OF EQUIPMENT	$203000
YEAR	RATE(MACRS)	DEPRECIATION		TAX BENEFIT@28%
1	20	$      40,600.00	($203000*20%)	$              11,368.00	($40600*28%)
2	32	$      64,960.00	($203000*32%)	$              18,188.80	($64960*28%)
3	19.2	$      38,976.00	($203000*19.2%)	$              10,913.28	($38976*28%)
4	11.52	$      23,385.60	($203000*11.52%)	$                6,547.97	($23385.6*28%)
5	11.52	$      23,385.60	($203000*11.52%)	$                6,547.97	($23385.6*28%)
6	5.76	$      11,692.80	($203000*5.76%)	$                3,273.98	($11692.8*28%)
PRESENT VALUE FACTOR(PVF)(@10%) FOR 3 YEARS
YEAR	PVF
1	0.9091
2	0.8264
3	0.7513
ANNUITY FACTOR @10% FOR 3 YEARS(SUM OF PVFs)	2.4869
OPERATING EXPENSES AFTER TAX
YEAR	EXPENSE	TAX(28%)	EXPENSE AFTER TAX
1	$     68,000.00	$      19,040.00	$                 48,960.00
2	$     68,000.00	$      19,040.00	$                 48,960.00
3	$     68,000.00	$      19,040.00	$                 48,960.00