A granary has two options for a conveyor used in the manufacture of grain for tr

Question

A granary has two options for a conveyor used in the manufacture of grain for transporting, filling, or emptying. One conveyor can be purchased and installed for $100,000 with $3,500 salvage value after 16 years. The other can be purchased and installed for $105,000 with $5,000 salvage value after 16 years. Operation and maintenance for each is expected to be $17,000 and $15,500 per year, respectively. The granary uses MACRS-GDS depreciation, has a marginal tax rate of 40%, and has a MARR of 9% after taxes. Determine which alternative is less costly, based upon comparison of after-tax annual worth.

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Explanation / Answer

PARTICULARS Conveyor1 ($) Conveyor2 ($) Life (a) 16 years 16 years Intial Investment (b) 100,000 105,000 Salvage Value © 3,500 5,000 Life under MACRS-GDS depreciation (d) 10 years 10 years Depreciation for each year (B-C)D 9,650 10,000 Operating Expenses per year 17,000 15,500 MARR 9% 9% Present Value of Annuity 9% for 10 years Commulative 6.42 6.42 Present Value of Depreciation (PV of 9% for 10 years * Depreciation) (F) 61,953 64,200 Tax Saving on Depreciation(Dep*40%) (G) 24,781 25,680 Actual Expenses (F-G) 37,172 38,520 X Present Value of 9% for 16 years Commulative (H) 8.31 8.31 Present Value of Operating Expenses (Expenses * H) 141,270 128,805 Total Expenditure (Intial Cost+Dep after Tax+Operating exp) 278,442 272,325 Less- Salvage Value (0.25* Salvage Value) 875 1,250 (0.25 is the Present Value of $1 after 16 years @9%) Y Total Cost (Total Exp - Salvage Value) 277,567 271,075 Annualised Cost (Total Cost/PV of 9% for 16 yearsCommulative) (Y/X) 33,402 32,620 CONEVYOR 2 IS LESS COSTLY

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