A subsidiary of AEP places in service electric generating and transmission line equipment at a cost of
Question:
A subsidiary of AEP places in service electric generating and transmission line equipment at a cost of \($3,000,000\) with half of it borrowed at 11 percent over 8 years. It is expected to last 30 years with a salvage value of \($250,000.\) The equipment will increase net income by \($500,000\) in the first year, increasing by 2.4 percent each year thereafter. The subsidiary’s tax rate is 40 percent, and the after-tax MARR is 9 percent.
There is some concern that the need for this equipment will last only 10 years and need to be sold off for \($550,000\) at that time. Develop tables using a spreadsheet to determine the ATCF for each year and the after-tax PW, AW, IRR, and ERR after only 10 years to see if the venture would be worthwhile economically if
a. straight-line depreciation is used with no half-year convention and the loan is paid back using Method 1
(interest only at the end of each year of the loan, plus principal at the end of the last year).
b. straight-line depreciation is used with no half-year convention and the loan is paid back using Method 2 (equal annual principal payments plus interest on the unpaid loan balance).
c. straight-line depreciation is used with no half-year convention and the loan is paid back using Method 3 (equal annual principal plus interest payments during each year of the loan).
d. MACRS-GDS depreciation is used with the appropriate property class and the loan is paid back using Method 1 (interest only at the end of each year of the loan, plus principal at the end of the last year).
e. MACRS-GDS depreciation is used with the appropriate property class and the loan is paid back using Method 2
(equal annual principal payments plus interest on the unpaid loan balance).
f. MACRS-GDS depreciation is used with the appropriate property class and the loan is paid back using Method 3
(equal annual principal plus interest payments during each year of the loan).
Step by Step Answer:
Principles Of Engineering Economic Analysis
ISBN: 9781118163832
6th Edition
Authors: John A. White, Kenneth E. Case, David B. Pratt