3. A telephone company is considering building a new automated switching distrib

Question

3. A telephone company is considering building a new automated switching distribution substation with a usefu lfe of 20 years to support new suburban developments. The substation is located in a state in which the combined tax rate is 40%, and the telephone company uses a 15% real interest MARR to assess capital investment projects. Estimated real dollar revenues and costs are as follows: Category Building initial cost Building salvage cost Equipment initial cost Equipment cost year 2 Equipment salvage value S36,500 Annual revenues Revenue arithmetic gradient S 20,000 years 2 to 5 Annual revenues Annual Amount $1,157,000 S 250,000 S 575,0OD S 150,0O0 S 650,000 year I S 750,000 years 6 to 20 l operating expenses S 185,000 first 10 years S 230,000, years to 15 S 275,000, years 16 to 20 The substation will be put into service on the first day of the telephone company's fiscal year. Using MACRS depreciation, what will be the telephone company's after tax equivalent uniform annual worth for the substation?

Explanation / Answer

Using MACRS depreciation, Depreciation in 1st year = Cost * 1/Useful life * A * Depreciation convention

                                                                            = ($1157000 + $575000 + $185000) * 1/20 * 200% * 1

                                                                            = $191700

                                         Depreciation in 2nd year = (Cost - Depreciation in previous years) * 1/Recovery period

                                                                                * 200%

                                                                            = ($150000 + $185000 - $191700) * 1/20 * 200%

                                                                            = $14330

                                         Depreciation in 3 to 10 years = $185000 * 1/20 * 200%

                                                                                    = $18500

                                        Depreciation in 11 to 15 years = $230000 * 1/20 * 200%

                                                                                    = $23000

                                        Depreciation in 16 to 20 years = $275000 * 1/20 * 200%

                                                                                     = $27500

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