(a):
Calculate the sunk cost.
(a):
Explanation of Solution
Time period is denoted by n and the interest rate is denoted by i. Sunk cost can be calculated as follows.
Sunk cost is $9,000.
(b):
Calculate the
(b):
Explanation of Solution
Opportunity cost is equal to the market value of that particular year. Thus, opportunity cost is $2,000. Present worth (PW) can be calculated as follows.
Present worth is $24,832.
(c):
Calculate the present worth.
(c):
Explanation of Solution
Time period is denoted by n and the interest rate is denoted by i. Present worth (PW) can be calculated as follows.
Present worth is $18,562.
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Chapter 14 Solutions
EBK CONTEMPORARY ENGINEERING ECONOMICS
- Greenleaf Company is considering the purchase of a new set of air-electric quill units to replace an obsolete machine. The current machine has a market value of zero; however, it is in good working order, and it will last physically for at least an additional five years. The new quill units will perform the operation with so much more efficiency that the firm's engineers estimate that labor, material, and other direct costs will be reduced by $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm's MARR is 10%.(a) What is the investment required to keep the old machine?(b) Compute the cash flow to use in the analysis of each option.(c) If the firm uses the internal-rate-of-return criterion, would the analysis indicate that the firm should buy the new machine?arrow_forwardConsider a machine that costs $40,000 and has a six-year useful life. At the end of the six years, it can be sold for $5,000 after all tax adjustments have been factored in. If the firm could earn an after-tax revenue of $5400 per year with this machine, should it be purchased at an interest rate of 13%?arrow_forwardGordon Inc. has a number of copiers that were bought four years ago for $20,000. Currently maintenance costs $2,000 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,000. The machines have a current resale value of $8,000, but at the end of year 2 their value will have fallen to $3,500. By the end of year 6 the machines will be valueless and would be scrapped. Gordon is considering replacing the copiers with new machines that would do essentially the same job. These machines cost $25,000, and the company can take out an eight-year maintenance contract for $1,000 a year. The machines have no value by the end of the eight years and would be scrapped. Both machines are depreciated by using seven-year MACRS, and the tax rate is 35 percent. Assume for simplicity that the inflation rate is zero. The real cost of capital is 7 percent. When should Gordon replace its copiers, now, the end of year 2, or the end of…arrow_forward
- An auto-part manufacturer is faced with the prospect of replacing its old robot, which has been used in stamping operation for 10 years. This particular robot was installed at a cost of $100,000 and was assumed to have a 15-year life with no appreciable salvage value. The current annual operating costs are $20,000 for this old robot, and these costs are presumed to be the same for the rest of its life. A sales representative from Advanced Robotic Systems is trying to sell this company a new-highly efficient robot. The new system would require an investment of $200,000 for installation. The economic life of this new robot is estimated to be IO years with a salvage value of $18,000, and the robot will reduce annual operating costs to $5,000. No detailed agreement has been made with the sales representative about the disposal of the old robot. Determine therange of resale values associated with the old system that would justify installation of the new system at a MARR of 14%.arrow_forwardYour company is contemplating the purchase of a large stamping machine. The machine will cost $180,000. With additional transportation and installation costs of $5,000 and $10,000, respectively, the cost basis for depreciation purposes is $195,000. Its MV at the end of five years is estimated as $40,000. The IRS has assured you that this machine will fall under a three-year MACRS class life category. The justifications for this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. Use this information to solve, The taxable income for year three is most nearly (a) $5,010 (b) $16,450 (c) $28,880 (d) $41,120 (e) $70,000.arrow_forwardUsing the asset description and table below, find the economic service life (ESL) of the asset, assuming MARR = 8%. The company is committed to using the asset for the upcoming year, but is unsure about the following years. Today's market value is $70,000, and it will last another 4 years before failure. Each year, the after-tax market value decreases by $10,000. The operating cost of the asset in year 1 is expected to be $30,000, and it will increase by $5,000 each year through year 4. a. 3 yearsb. 1 yearc. 4 yearsd. 2 yearsarrow_forward
- Replacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: New equipment Old equipmentNew equipment cost -4,645,000 Year Operating cash flows 1 551,000 372,000 2 931,000 372,000 3 1,344,000 372,000 4 2,221,000 372,000 5 3,399,000 372,000 New Equipment Old Equipment New Equipment Cost -$4,645,000 Year Operating Cash Flows 1 $551,000 $372,000 2 $931,000 $372,000 3 $1,344,000 $372,000 4 $2,221,000 $372,000 5 $3,399,000…arrow_forwardA small manufacturing firm is considering the purchase of a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the following expected receipts and disbursements: After four years of use, the salvage value for Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year.(a) How many decision alternatives are there?(b) Which decision appears to be the best at i = 10%?arrow_forwardAn electric bulb bought for P100 is guaranteed to be used for 50 hours. The certain company uses the said bulb 10 hours a day. If there is no scrap value for the bulb, compute the daily depreciation, and create the depreciation table throughout its economic lifearrow_forward
- The existing asset’s economic life can be found if certain estimates about it can be made. Assuming those estimates prove to be exactly correct, one can accurately predict the year when the existing asset should be replaced, even if nothing is known about potential new assets. True or false? Explain.arrow_forward. A machine costs $ 10,000 and is expected to be scrapped for $ 1,500 in the moment he retires. Operating expenses for the first year are expected to be $ 3,500 and increasing by $ 400 as a result of the impairment; and operating income Estimated $ 20,000 If the MARR is 15%, determine the economic life of the machine.arrow_forwardA stamping machine is classified as seven-year MACRS property. The costbasis for the machine is $120,000, and the expected salvage value is $10,000 at the end of 12 years. Compute the book value at the end of three years for tax purposes.arrow_forward
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