1. (40 points) Frank\'s Fruitcakes is looking to purchase a web server system fo
ID: 1198677 • Letter: 1
Question
1. (40 points) Frank's Fruitcakes is looking to purchase a web server system for e-business. Alternative 1 is to purchase an off-brand system, with equipment costing $50,000. Training, installation, and operating costs are shown in the expense column of the table below. Alternative 2 is to purchase a name brand system for $80,000, including training and installation. Operating costs are $30,000 per year. Both systems are expected to generate $100,000 per year in gross income. Both systems have a 5-year MACRS recovery period. But, due to rapid advancement of server technology, either system will be sold at the end of 3 years for an expected $20,000. Use after-tax present worth analysis to determine which alternative to select. Use an after-tax MARR of 19% a federal tax rate of 34%, and a state tax rate of 10% Complete parts A to E. A. Find the book value of Alternative 1 after 3 years. Then find the capital loss or depreciation recapture B. Find the capital loss or depreciation recapture of Alternative 2 after 3 years. Complete on excel
Explanation / Answer
Book Value of Alternate 1 = 3,00,000-90000-50000-112000 -30000+20000= 28000
MaRR = 19% of 140000 = 26600
Capital loss = +1400
Book Value of alternate 2 = 3,00000-80000-90000-1120000-30000 +20000= -2000
MARR = 19% of 170000 = 32300
Capital loss = 35300
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