Five years ago a chemical plant invested $90,000 in a pumping station on a nearby river to provide the water required for their production process. Straight-line depreciation is employed for tax purposes, using a 30-year life and zero salvage value. A nearby city has offered to purchase the pumping station for $75,000 as it is in the process of developing a city water distribution system. The city is willing to sign a 10-year contract with the plant to provide the plant with its required volume of water for a price of $10,000 per year. Plant officials estimate that the salvage value of the pumping station 10 years hence will be about $30,000. The before-tax MARR is 10% per year. An effective income tax rate of 30% is to be assumed. Compare the annual cost (after taxes) of the defender (keep the pumping station) to the challenger (sell station to the city) and help plant management determine the more economical course of action. Assume study period is 10 years. Click the icon to view the table for operating costs during the past five years. The EUAC Defender is $ 12,532. (Round to the nearest dollar.) The EUAC Challenger is $ (Round to the nearest dollar.) Maintenance Power and labor $2,000 per year $4,500 per year Taxes and insurance $1,000 per year Total $7,500 per year
Five years ago a chemical plant invested $90,000 in a pumping station on a nearby river to provide the water required for their production process. Straight-line depreciation is employed for tax purposes, using a 30-year life and zero salvage value. A nearby city has offered to purchase the pumping station for $75,000 as it is in the process of developing a city water distribution system. The city is willing to sign a 10-year contract with the plant to provide the plant with its required volume of water for a price of $10,000 per year. Plant officials estimate that the salvage value of the pumping station 10 years hence will be about $30,000. The before-tax MARR is 10% per year. An effective income tax rate of 30% is to be assumed. Compare the annual cost (after taxes) of the defender (keep the pumping station) to the challenger (sell station to the city) and help plant management determine the more economical course of action. Assume study period is 10 years. Click the icon to view the table for operating costs during the past five years. The EUAC Defender is $ 12,532. (Round to the nearest dollar.) The EUAC Challenger is $ (Round to the nearest dollar.) Maintenance Power and labor $2,000 per year $4,500 per year Taxes and insurance $1,000 per year Total $7,500 per year
Chapter18: Accounting Periods And Methods
Section: Chapter Questions
Problem 2RP
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Transcribed Image Text:Five years ago a chemical plant invested $90,000 in a pumping station on a nearby river to provide the water required for their production process. Straight-line depreciation is employed for tax
purposes, using a 30-year life and zero salvage value.
A nearby city has offered to purchase the pumping station for $75,000 as it is in the process of developing a city water distribution system. The city is willing to sign a 10-year contract with the plant
to provide the plant with its required volume of water for a price of $10,000 per year. Plant officials estimate that the salvage value of the pumping station 10 years hence will be about $30,000. The
before-tax MARR is 10% per year. An effective income tax rate of 30% is to be assumed. Compare the annual cost (after taxes) of the defender (keep the pumping station) to the challenger (sell
station to the city) and help plant management determine the more economical course of action. Assume study period is 10 years.
Click the icon to view the table for operating costs during the past five years.
The EUAC Defender is $ 12,532. (Round to the nearest dollar.)
The EUAC Challenger is $
(Round to the nearest dollar.)
Transcribed Image Text:Maintenance
Power and labor
$2,000 per year
$4,500 per year
Taxes and insurance
$1,000 per year
Total
$7,500 per year
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