16. A currently owned shredder originally costing $800,000 was purchased 6 years

Question

16. A currently owned shredder originally costing $800,000 was purchased 6 years ago for use in a refuse-powered electrical generating plant. It was depreciated as MACRS-GDS 5-year property due to its status as an alternative energy item. It has a present net realizable value of $210,000 and is expected to have a market value of $10,000 after 4 more years. Operating and maintenance disbursements are $100,000 per year. An equivalent shredder can be leased for $200 per day plus $80 per hour of actual use as determined by an hour meter, with both components assumed to be paid at year-end. Actual use is expected to be 1,500 hours and 250 days per year. Use the cash flow approach (insider’s approach), a 4-year planning horizon, a tax rate of 40 percent, and an after-tax MARR of 9 percent to perform an after-tax analysis to determine the preferred alternative using the annual cost criterion. a. Use only the above information. (11.2.2) b. Consider the addition of a third alternative, to operate without any shredder, at an annual cost of $190,000. (11.2.2)

Explanation / Answer

Price of old Equipment $210,000 Salvage Value $10,000 Operating @ Maintaenence $100,000 MARR 9.00% Planning Horizon 4 Alternative 1 Year Cash Flow PV @ 9% Present Value 0 0 1.0000 $0 1 -100000 0.9174 -$91,743.12 2 -100000 0.8417 -$84,168 3 -100000 0.7722 -$77,218.35 4 -90000 0.7084 -$63,758.27 -$316,887.74 Alternative 2 Salvage Value $10,000 Operating and Maintaenence 250 x200+1500x 80 $170,000 MARR 9.00% Planning Horizon 4 Year Cash Flow PV @ 9% Present Value 0 0 1.0000 $0 1 -170000 0.9174 -$155,963.3 2 -170000 0.8417 -$143,085.6 3 -170000 0.7722 -$131,271.19 4 -10000 0.7084 -$7,084.25 -$437,404.35

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