A company has two different devices it can purchase to perform a specific task.

Question

A company has two different devices it can purchase to perform a specific task. Device A costs $110,000 initially, whereas device B costs $150,000. It has been estimated that the cost of maintenance will be $5,500 for device A and $3,250 for device B in the first year. Management expects these maintenance costs to increase 89 per year. The company uses a sx-year study penod, and its effective income tax rate is 45%, Both devices qualify as five-year MACRS GDS property. Which device should the company choose if the after-tax, market-based MARR is 8% per year (ay? Click the icon to view the interest and annuity table for discrete compounding when i 8% per year. The PW of the Device A is (Round to the nearest dollar.) The PW of the Device B is S(Round to the nearest dollar.) Which device should the hospital choose? Choose the correct answer below. O Device B O Device A Click to select your answerfs).

Explanation / Answer

Device A should be selected because PW of A is greater than PW of B. as per following calculations

Device A A B C D E F G 1 Year 0 1 2 3 4 5 6 2 Initial Investment 110000 3 Maintenance Cost 5500 5940 6415.2 6928.416 7482.689 8081.304 Maintenenance * ( 1+growth) 4 MACRS 6year rates 20% 32% 19.20% 11.52% 11.52% 5.76% 5 Depreciation 22000 35200 21120 12672 12672 6336 6 EBIT= -maintennace cost -depreciation -27500 -41140 -27535.2 -19600.4 -20154.7 -14417.3 7 Tax = EBIT * Tax Rate -12375 -18513 -12390.8 -8820.19 -9069.61 -6487.79 8 EAT =EBIT -Tax -15125 -22627 -15144.4 -10780.2 -11085.1 -7929.52 9 depreciation 22000 35200 21120 12672 12672 6336 10 Free Cash flow = EAT + Depreciation -110000 6875 12573 5975.64 1891.771 1586.921 -1593.52 11 MARR 8% 12 Present Worth -86645 NPV(A11,B10:G10) + A10 Device A A B C D E F G 1 Year 0 1 2 3 4 5 6 2 Initial Investment 150000 3 Maintenance Cost 3250 3510 3790.8 4094.064 4421.589 4775.316 Maintenenance * ( 1+growth) 4 MACRS 6year rates 20% 32% 19.20% 11.52% 11.52% 5.76% 5 Depreciation 30000 48000 28800 17280 17280 8640 6 EBIT= -maintennace cost -depreciation -33250 -51510 -32590.8 -21374.1 -21701.6 -13415.3 7 Tax = EBIT * Tax Rate -14962.5 -23179.5 -14665.9 -9618.33 -9765.72 -6036.89 8 EAT =EBIT -Tax -18287.5 -28330.5 -17924.9 -11755.7 -11935.9 -7378.42 9 depreciation 30000 48000 28800 17280 17280 8640 10 Free Cash flow = EAT + Depreciation -150000 11712.5 19669.5 10875.06 5524.265 5344.126 1261.576 11 MARR 8% 12 Present Worth -105166 NPV(A11,B10:G10) + A10

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