ect L am not ac an not, w the foreseeable future, so the computers will need to
ID: 2803970 • Letter: E
Question
ect L am not ac an not, w the foreseeable future, so the computers will need to be replaced. Two vendors have submitted bids. Vendor A offers a system that costs $475,000, and the annual pre-tax costs of operating this system would be $90,000 per year. The system would last for 3 years. Vendor B's system would cost $600,000, have annual pre-tax operating costs of $97,000, and would last for 5 years. Both computers will be depreciated to zero using the straight-line method, and both can be sold at the end of their useful lives for S76 If your discountrates14%, and your tax rate is 35%, which system should you buy? Show how you came to your decision. (15 points) 13. You need a new computer system for an upcoming product láunch. You plan to keep producing for 0 2. 3 1b2 PMT- 62,SyYExplanation / Answer
Since Equated Annual Cost (EAC) is less in case of vendor A, it is preferred to buy machine from Vendor A.
Vendor A Vendor B A Initial Cash Flow -475000 -600000 B Recurring Cash Flows Pretax Costs -90000 -97000 Less: Taxes -31500 -33950 After tax Costs -58500 -63050 Depreciation 158333.3333 120000 After tax Cash Flow 99833.33333 56950 Life (Years) 3 5 PVAF (14%) 2.321632 3.433081 PV of CF 231776.2613 195513.963 C Terminal Cash Flow Sale Value 76000 76000 Less: Taxes 26600 26600 Sale Value after taxes 49400 49400 PVIF(14%) 0.6749715 0.5193687 PV of sale value after taxes 33343.5921 25656.8138 D NPV (A+B+C) -209880.147 -378829.223 E PVAF (14%) 2.321632 3.433081 F EAC (D/E) -90401.9873 -110346.719Related Questions
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