Five years ago a chemical plant invested $90,000 in a pumping station on a nearb

Question

Five years ago a chemical plant invested $90,000 in a pumping station on a nearby river to provide the water required for their production process. Straight line depreciation is employed for tax purposes, using a 30-year life and zero salvage value. During the past five years, operating costs have been $8,000 per year, and is projected to remain constant for the remainder of service. A nearby city has offered to purchase the pumping station for $80,000 as it is in the process of developing a city water distribution system. The city is willing to sign a 10-year contract with the plant to provide the plant with its required volume of water for a price of $10,000 per year. Plant officials estimate that the salvage value of the pumping station 10 years hence will be about $35,000. The before-tax MARR is 10% per year. An effective income tax rate of 50% is to be assumed. Calculate the EUAC of the defender on an after-tax basis. a. $8,981 b. $10,435 c. $12,356 d. $7,980 e. $9,356

Explanation / Answer

useful life Depreciation per year Initial Cost 90000 30 3000 For 5 years 15000 Before Tax MARR 10% Book Value Now 75000 After Tax MARR 5% Sale Value Now 80000 (1-0.5)10% Gain 5000 Tax on gain 2500 Effective value in hand (80000-2500) 77500 It os our opportunity cost for not selling (Defender) Salvage Value after 15 year 35000 Book value at that time 45000 EUAC = 77500(A/P,5%,10)+2500-40000(A/F,5%,10) Loss -10000 $ 10,036.60 $ 2,500.00 $ -3,180.18 $ 9,356.42 Tax Saving @ 50% due to loss 5000 PMT(5%,10,77500) PMT(5%,10,,40000) Effective Salvage Value (35000+5000) 40000 Ans is E $9356 Annual Cost 8000 Depreciation 3000 Tax saving @ 50% 5500 Effective annual cost (8000-5500) 2500

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