A firm is concerned about the condition of some of its plant machinery. Bill James, a newly
Question:
Alternative A: Spend $44,000 now repairing various items. The $44,000 can be charged as a current operating expense (rather than capitalized) and deducted from other taxable income immediately. These repairs are anticipated to keep the plant functioning for the next 7 years with operating costs remaining at present levels.
Alternative B: Spend $49,000 to buy general purpose equipment. Depreciation would be straight line, with the depreciable life equal to the 7-year useful life of the equipment. The equipment will have no end-of-useful-life salvage value. The new equipment will reduce operating costs $6000 per year below the present level.
Alternative C: Spend $56,000 to buy new specialized equipment. This equipment would be depreciated by sum-of-years' -digits depreciation over its 7-year useful life. This equipment would reduce operating costs $12,000 per year below the present level. It will have no end-of useful- life salvage value.
Alternative D: This alternative is the same as Alternative B, except that this particular equipment would reduce operating costs $7000 per year below the present level.
Alternative E: This is the "do-nothing" alternative. If nothing is done, future annual operating costs are expected to be $8000 above the present level.
This profitable firm pays 40% corporate income taxes. In their economic analysis, they require a 10% after-tax rate of return. Which of the five alternatives should the firm adopt?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Engineering Economic Analysis
ISBN: 9780195168075
9th Edition
Authors: Donald Newnan, Ted Eschanbach, Jerome Lavelle
Question Posted: