A specialty concrete mixer used in construction was purchased for $275,000 7 yea

Question

A specialty concrete mixer used in construction was purchased for $275,000 7 years ago. It is MACRS-GDS 5-year property. Its annual O&M costs are $80,000. At the end of an 8-year planning horizon, the mixer will have a salvage value of $5,000. If the mixer is replaced, a new mixer will require an initial investment of $375,000, and at the end of the 8-year planning horizon, the new mixer will have a salvage value of $45,000. Its annual O&M cost will be only $40,000 due to newer technology. Use an EUAC measure, a tax rate of 40 percent, and an after-tax MARR of 9 percent to perform an after-tax analysis to see if the concrete mixer should be replaced if the old mixer is sold for its market value of $73,000.

Use the cash flow approach (insider’s viewpoint approach).

Use the opportunity cost approach (outsider’s viewpoint approach).

Show the EUAC values used to make your decision.

Explanation / Answer

cash flow approach

Cash outflow

initial investment= 375000

Less- salvage value of old mixer= 64200 (73000-8800)

[Sale proceeds= 73000

Less-WDV Value= 95000

Loss on sale= 22000

Tax savings= 8800]

Cost= 310800

Cash inflow=

Savings in O&M Cost due to new mixture= 80000-40000= 40000

P.V. of cash inflow= 221400 (5.535*40000)

Savings in salvage value = 45000-5000= 40000

P.V. of cash inflow= 221400 (5.535*40000)

EUAC= 442800-310800

=132000

Opportunity cost approach

Initial investment= 375000

Less- Opportunity cost of old machine= 275000

Amount= 100000

Cash inflow=

Savings in O&M Cost due to new mixture= 80000-40000= 40000

P.V. of cash inflow= 221400 (5.535*40000)

Savings in salvage value = 45000-5000= 40000

P.V. of cash inflow= 221400 (5.535*40000)

EUAC= 442800- 100000

=342800

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