A portable concrete test instrument used in construction for evaluating and prof
ID: 2523101 • Letter: A
Question
A portable concrete test instrument used in construction for evaluating and profiling concrete surfaces (MACRS-GDS 5-year property class) is under consideration by a construction firm for $24,500. The instrument will be used for 6 years and be worth $1,000 at that time. The annual cost of use and maintenance will be $10,000. Alternatively, a more automated instrument (same property class) available from the manufacturer costs $30,000, with use and maintenance costs of only $6,500 and salvage value after 6 years of $3,500. The marginal tax rate is 40%, and MARR is an after-tax 12%.
Determine which alternative is less costly, based upon comparison of after-tax annual worth: Alternative 1 or Alternative 2
Show the AW values used to make your decision:
Alternative 1: $______
Alternative 2: $_______
Explanation / Answer
Calculation for the first machine
Depreciation for the first machine = (24,500 - 1000) / 6 = $3,916.67
Expenses = $10,000
Savings on expenses = 40% of 10,000 = 4,000
Net savings in depreciation = 3,916.67 x 40% = 1566.67
Total expense - savings = net expense = 10,000 + 3916.67 - 4000 - 1566.67 = 8350
Machine 2
costs $30,000
Depreciation = (30,000 - 3500) / 6 = $4416.67 Savings on depreciation = 4416.67 x 40% = 1766.67
Maintenance expense = $6500
Savings = 6500 x 40% = 2600
Total expense = 6500 + 4416.67 - 1766.67 - 2600 = $6550
Machine 1 Machine 2 MARR
Year 1 - 5,566.67 6550 0.892
Year 2 - 5,566.67 6550 0.797
Year 3 - 5,566.67 6550 0.7117
Year 4 - 5,566.67 6550 0.6355
Year 5 - 5,566.67 6550 0.5674
Year 6 - 5,566.67 6550 0.5066
Cummulative
factor 4.111
Net outflow = 22,886.84 26,929.71
24,500 30,000
= 47,386.84 56,929.71
Even if we dont consider the amount of Salvage its is visible that outflow of cash is lesser in Machine 1 than in Machine 2
So buy machine 1
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