Two investments involving a virtual mold apparatus for producing dental crowns q
ID: 2734014 • Letter: T
Question
Two investments involving a virtual mold apparatus for producing dental crowns qualify for different property classes. Investment A has a cost of $56,500.00, lasts 9 years with no salvage value, and costs $150, 000 per year in operating expenses. It is in the 3-year property class. Investment B has a cost of $87,500.00, lasts 9 years with no salvage value, and costs $125,000 per year. Investment B, however, is in the 7-year property class. The company marginal tax rate is 40%, and MARR is an after-tax 10%. Based upon the use of MACRS-GDS depreciation, compare the AW of each alternative. Which should be selected? (Investment A; Investment B) What must be Investment B's cost of operating expenses for these two investments to be equivalent? $ Round your answer to 2 decimal places. The tolerance is +/- 10.Explanation / Answer
Answer :-
Investment - A
Cost = 56500
life = 9 years
3 yr property class
tax rate = 40%
interest rate = 10%
-150000*5year
= -750000
=(150000*33.33%)
=-49995
=(150000*44.45%)
=-66675
=(150000*14.81%)
=-22215
=(150000*7.41%)
=-11115
=(199995*40%)
=-79998
NPV = - 3434906 - 56500
= - 3491406
EAC / EAW = NPV / PVIFA at (r, n)
= - 3491406 / pvifa at (10%, 9 years)
= - 3491406 / 5.759
= $ - 606252.13
Investment - B
Cost = 87500
life = 9 years
7 yr property class
tax rate = 40%
interest rate = 10%
-125000
=(125000*14.29%)
=-17862.5
=
(125000*24.49%)
=-30612.5
=
(125000*17.49%)
=-21862.5
=
(125000*12.49%)
=-15612.5
=(125000*8.93%)
(125000*8.92%)
=-11150
=(125000*8.93%)
=(125000*4.46%)
-40%
NPV = - 1043894 - 87500
= - 1131394
EAC / EAW = NPV / PVIFA at (r, n)
= - 1131394 / pvifa at (10%, 9 years)
= - 11319394 / 5.759
= $ - 196456.68
[ Investment - B is the best option, because its EAC & EAW is less than the Investment - A ]
Year 1 2 3 4 5 to 9 operating expense -150000 -150000 -150000 -150000-150000*5year
= -750000
less:- Depreciation=(150000*33.33%)
=-49995
=(150000*44.45%)
=-66675
=(150000*14.81%)
=-22215
=(150000*7.41%)
=-11115
0 Total -199995 -216675 -172215 -161115 -750000 less:- tax @ 40%=(199995*40%)
=-79998
-40% -40% -40% -40% Add:- Depreciation 49995 66675 22215 11115 0 Total cash outflow -229998 -236670 -218886 -214446 -1050000 PVIF at 10% .909 .826 .751 .683 2.59 TOTAL -209068 -195489 -164383 -146466 -2719500Related Questions
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