A contractor involved in heavy construction has received a four year contract fo

Question

A contractor involved in heavy construction has received a four year contract for bridge maintenance work for which a special crane costing $250,000 is required. The contract starts on July 1, 2013 and end on June 30, 2017. At the end of the contract, the crane would be sold for $75,000. The operating expenses are estimated to be $30,000 in 2013 and 2017 and $60,000 for the years 2014-2016. Determine the after-tax equivalent uniform annual cost of owning and operating this equipment. Assume the effective income tax rate to be 40%, an after tax MARR of 15%, and MACRS (GDS) depreciation.

Explanation / Answer

Details Year 0 Year 1 Year 2 Year 3 Year 4 MACRS rate 33.33% 44.45% 14.81% 7.41% Crane cost         250,000 Depreciation          83,325.00        111,125.00       37,025.00      18,525.00 Salvage              75,000 Tax rate   40% Post Tax salvage              45,000 EAC Calculation Investment         250,000 Post Tax Operating expense=(1-T)*Expense            18,000              36,000                36,000             36,000            18,000 Depreciation Tax shield=Depreciation*Tax rate            (33,330)              (44,450)           (14,810)            (7,410) Post Tax salvage            (45,000) Net Post Tax costs         268,000                2,670                (8,450)             21,190          (34,410) PV factor @15%                      1                0.870                   0.756               0.658              0.572 PV of Post Tax costs 268,000.00          2,321.74          (6,389.41)       13,932.77    (19,674.03) Sum of PV of post tax costs 258,191.06 EAC annuity factor=Sum of PV factors=            3.8550 EAC =258191.06/3.8550= $ 66,976.01

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