The machine to be selected.
Answer to Problem 74P
Machine (III) should be selected.
Explanation of Solution
Given:
The taxable income is
After tax MARR is
The selling price is
Project life is
Concept used:
Calculations:
Make the table for alternatives and their data.
Alternative | Initial Cost | Before tax cost | Salvage Value |
(I) | |||
(II) | |||
(III) | |||
(IV) |
Table-(1)
Assume the tax rate applicable here is
From the observations, the first alternative having cost of just
As compared to alternative (III) and (IV), the alternative (II) also has a low cost per year over the time frame.
Hence, alternative (II) is also rejected.
Now the alternatives (III) and (IV) are left.
Consider alternative (III).
Calculate the depreciation under MACRS rate as shown below.
Year | Cost Basis |
MACRS rate |
Depreciation |
Table-(2)
Make the before and after tax cash flow table.
Year | Before taxCash flow |
Depreciation |
Taxable income |
Income taxes |
After taxCash flow |
$52.8 | |||||
Table-(3)
Write the expression to calculate the present value with non uniform cash flow.
Here, the present value is P, the annual benefit is A, the salvage value is SV and the rate is i.
Substitute the value of
Solve Equation (II) for
Consider alternative (IV).
Calculate the depreciation under MACRS rate as shown below.
Year | Cost Basis |
MACRS rate |
Depreciation |
Table-(4)
Make the before and after tax cash flow table.
Year | Before taxCash flow |
Depreciation |
Taxable income |
Income taxes |
After taxCash flow |
Table-(5)
Substitute the value of
Solve Equation (III) for
Conclusion:
The after tax rate of return of alternative (III) is greater than alternative (II) and also greater than the MARR.
Hence, machine (III) should be selected.
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Chapter 12 Solutions
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